Correlation Between KENNAMETAL INC and Insurance Australia

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

By analyzing existing cross correlation between KENNAMETAL INC and Insurance Australia Group, you can compare the effects of market volatilities on KENNAMETAL INC and Insurance Australia 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 KENNAMETAL INC with a short position of Insurance Australia. Check out your portfolio center. Please also check ongoing floating volatility patterns of KENNAMETAL INC and Insurance Australia.

Diversification Opportunities for KENNAMETAL INC and Insurance Australia

0.75

Correlation Coefficient

KENNAMETAL INC  Insurance Australia

Poor diversification

The 3 months correlation between KENNAMETAL and Insurance is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding KENNAMETAL INC and Insurance Australia Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Insurance Australia and KENNAMETAL INC 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 KENNAMETAL INC are associated (or correlated) with Insurance Australia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Insurance Australia has no effect on the direction of KENNAMETAL INC i.e., KENNAMETAL INC and Insurance Australia go up and down completely randomly.

Pair Corralation between KENNAMETAL INC and Insurance Australia

Assuming the 90 days trading horizon KENNAMETAL INC is expected to under-perform the Insurance Australia. But the stock apears to be less risky and, when comparing its historical volatility, KENNAMETAL INC is 1.4 times less risky than Insurance Australia. The stock trades about -0.11 of its potential returns per unit of risk. The Insurance Australia Group is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  492.00  in Insurance Australia Group on December 30, 2024 and sell it today you would lose (46.00) from holding Insurance Australia Group or give up 9.35% of portfolio value over 90 days.

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

KENNAMETAL INC  vs.  Insurance Australia Group

KENNAMETAL INC

Risk-Adjusted Performance

Very Weak

Over the last 90 days KENNAMETAL INC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Insurance Australia

Risk-Adjusted Performance

Very Weak

Over the last 90 days Insurance Australia Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with KENNAMETAL INC and Insurance Australia

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

The idea behind KENNAMETAL INC and Insurance Australia Group 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.