Correlation Between GMO Internet and Diageo Plc

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

By analyzing existing cross correlation between GMO Internet and Diageo Plc, you can compare the effects of market volatilities on GMO Internet and Diageo Plc 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 GMO Internet with a short position of Diageo Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of GMO Internet and Diageo Plc.

Diversification Opportunities for GMO Internet and Diageo Plc

-0.12

Correlation Coefficient

GMO Internet  Diageo Plc

Good diversification

The 3 months correlation between GMO and Diageo is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding GMO Internet and Diageo Plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diageo Plc and GMO Internet 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 GMO Internet are associated (or correlated) with Diageo Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diageo Plc has no effect on the direction of GMO Internet i.e., GMO Internet and Diageo Plc go up and down completely randomly.

Pair Corralation between GMO Internet and Diageo Plc

Assuming the 90 days horizon GMO Internet is expected to under-perform the Diageo Plc. But the stock apears to be less risky and, when comparing its historical volatility, GMO Internet is 1.12 times less risky than Diageo Plc. The stock trades about -0.28 of its potential returns per unit of risk. The Diageo Plc is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,932  in Diageo Plc on October 10, 2024 and sell it today you would earn a total of  101.00  from holding Diageo Plc or generate 3.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	94.44%
Values	Daily Returns

GMO Internet  vs.  Diageo Plc

GMO Internet

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in GMO Internet are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, GMO Internet is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Diageo Plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo Plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Diageo Plc is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with GMO Internet and Diageo Plc

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

The idea behind GMO Internet and Diageo Plc 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.