Correlation Between Basic Materials and Lockheed Martin

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Lockheed Martin at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Basic Materials and Lockheed Martin into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and Lockheed Martin, you can compare the effects of market volatilities on Basic Materials and Lockheed Martin and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Basic Materials with a short position of Lockheed Martin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Lockheed Martin.

Diversification Opportunities for Basic Materials and Lockheed Martin

-0.28

Correlation Coefficient

Basic Materials  Lockheed Martin

Very good diversification

The 3 months correlation between Basic and Lockheed is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Lockheed Martin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lockheed Martin and Basic Materials is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Basic Materials are associated (or correlated) with Lockheed Martin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lockheed Martin has no effect on the direction of Basic Materials i.e., Basic Materials and Lockheed Martin go up and down completely randomly.

Pair Corralation between Basic Materials and Lockheed Martin

Assuming the 90 days trading horizon Basic Materials is expected to generate 1.47 times more return on investment than Lockheed Martin. However, Basic Materials is 1.47 times more volatile than Lockheed Martin. It trades about -0.1 of its potential returns per unit of risk. Lockheed Martin is currently generating about -0.18 per unit of risk. If you would invest  576,167  in Basic Materials on September 28, 2024 and sell it today you would lose (17,361) from holding Basic Materials or give up 3.01% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Basic Materials  vs.  Lockheed Martin

Pair Trading with Basic Materials and Lockheed Martin

The main advantage of trading using opposite Basic Materials and Lockheed Martin positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Lockheed Martin can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Lockheed Martin will offset losses from the drop in Lockheed Martin's long position.

The idea behind Basic Materials and Lockheed Martin pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Transaction History module to view history of all your transactions and understand their impact on performance.