Correlation Between Basic Materials and Whirlpool

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Whirlpool 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 Whirlpool into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and Whirlpool SA, you can compare the effects of market volatilities on Basic Materials and Whirlpool 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 Whirlpool. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Whirlpool.

Diversification Opportunities for Basic Materials and Whirlpool

0.08

Correlation Coefficient

Basic Materials  Whirlpool

Significant diversification

The 3 months correlation between Basic and Whirlpool is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Whirlpool SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Whirlpool SA 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 Whirlpool. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Whirlpool SA has no effect on the direction of Basic Materials i.e., Basic Materials and Whirlpool go up and down completely randomly.

Pair Corralation between Basic Materials and Whirlpool

Assuming the 90 days trading horizon Basic Materials is expected to generate 0.72 times more return on investment than Whirlpool. However, Basic Materials is 1.4 times less risky than Whirlpool. It trades about 0.04 of its potential returns per unit of risk. Whirlpool SA is currently generating about -0.04 per unit of risk. If you would invest  561,479  in Basic Materials on September 14, 2024 and sell it today you would earn a total of  15,760  from holding Basic Materials or generate 2.81% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Basic Materials  vs.  Whirlpool SA

Pair Trading with Basic Materials and Whirlpool

The main advantage of trading using opposite Basic Materials and Whirlpool positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials position performs unexpectedly, Whirlpool 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 Whirlpool will offset losses from the drop in Whirlpool's long position.

The idea behind Basic Materials and Whirlpool SA 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.

Check out your portfolio center.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.