Correlation Between Karachi 100 and Engro Fertilizers

Can any of the company-specific risk be diversified away by investing in both Karachi 100 and Engro Fertilizers 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 Karachi 100 and Engro Fertilizers into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Karachi 100 and Engro Fertilizers, you can compare the effects of market volatilities on Karachi 100 and Engro Fertilizers 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 Karachi 100 with a short position of Engro Fertilizers. Check out your portfolio center. Please also check ongoing floating volatility patterns of Karachi 100 and Engro Fertilizers.

Diversification Opportunities for Karachi 100 and Engro Fertilizers

0.68

Correlation Coefficient

Karachi 100  Engro Fertilizers

Poor diversification

The 3 months correlation between Karachi and Engro is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Karachi 100 and Engro Fertilizers in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Engro Fertilizers and Karachi 100 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 Karachi 100 are associated (or correlated) with Engro Fertilizers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Engro Fertilizers has no effect on the direction of Karachi 100 i.e., Karachi 100 and Engro Fertilizers go up and down completely randomly.

Pair Corralation between Karachi 100 and Engro Fertilizers

Assuming the 90 days trading horizon Karachi 100 is expected to generate 0.69 times more return on investment than Engro Fertilizers. However, Karachi 100 is 1.45 times less risky than Engro Fertilizers. It trades about 0.28 of its potential returns per unit of risk. Engro Fertilizers is currently generating about 0.09 per unit of risk. If you would invest  8,584,034  in Karachi 100 on October 15, 2024 and sell it today you would earn a total of  2,740,666  from holding Karachi 100 or generate 31.93% return on investment over 90 days.

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

Karachi 100  vs.  Engro Fertilizers

Pair Trading with Karachi 100 and Engro Fertilizers

The main advantage of trading using opposite Karachi 100 and Engro Fertilizers positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Karachi 100 position performs unexpectedly, Engro Fertilizers 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 Engro Fertilizers will offset losses from the drop in Engro Fertilizers' long position.

The idea behind Karachi 100 and Engro Fertilizers 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.