Correlation Between JD Sports and Melrose Industries

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

By analyzing existing cross correlation between JD Sports Fashion and Melrose Industries PLC, you can compare the effects of market volatilities on JD Sports and Melrose Industries 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 JD Sports with a short position of Melrose Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of JD Sports and Melrose Industries.

Diversification Opportunities for JD Sports and Melrose Industries

-0.64

Correlation Coefficient

JD Sports  Melrose Industries

Excellent diversification

The 3 months correlation between JDDSF and Melrose is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding JD Sports Fashion and Melrose Industries PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melrose Industries PLC and JD Sports 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 JD Sports Fashion are associated (or correlated) with Melrose Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melrose Industries PLC has no effect on the direction of JD Sports i.e., JD Sports and Melrose Industries go up and down completely randomly.

Pair Corralation between JD Sports and Melrose Industries

Assuming the 90 days horizon JD Sports is expected to generate 13.98 times less return on investment than Melrose Industries. But when comparing it to its historical volatility, JD Sports Fashion is 4.45 times less risky than Melrose Industries. It trades about 0.03 of its potential returns per unit of risk. Melrose Industries PLC is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  336.00  in Melrose Industries PLC on October 11, 2024 and sell it today you would earn a total of  371.00  from holding Melrose Industries PLC or generate 110.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	72.53%
Values	Daily Returns

JD Sports Fashion  vs.  Melrose Industries PLC

JD Sports Fashion

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days JD Sports Fashion has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, JD Sports is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Melrose Industries PLC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Melrose Industries PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Melrose Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with JD Sports and Melrose Industries

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

The idea behind JD Sports Fashion and Melrose Industries 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.

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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.