Correlation Between Life Healthcare and Allied Electronics

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

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

Diversification Opportunities for Life Healthcare and Allied Electronics

-0.23

Correlation Coefficient

Life Healthcare  Allied Electronics

Very good diversification

The 3 months correlation between Life and Allied is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Life Healthcare and Allied Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allied Electronics and Life Healthcare 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 Life Healthcare are associated (or correlated) with Allied Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allied Electronics has no effect on the direction of Life Healthcare i.e., Life Healthcare and Allied Electronics go up and down completely randomly.

Pair Corralation between Life Healthcare and Allied Electronics

Assuming the 90 days trading horizon Life Healthcare is expected to under-perform the Allied Electronics. But the stock apears to be less risky and, when comparing its historical volatility, Life Healthcare is 1.25 times less risky than Allied Electronics. The stock trades about -0.18 of its potential returns per unit of risk. The Allied Electronics is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  200,500  in Allied Electronics on December 4, 2024 and sell it today you would earn a total of  3,200  from holding Allied Electronics or generate 1.6% return on investment over 90 days.

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

Life Healthcare  vs.  Allied Electronics

Life Healthcare

Risk-Adjusted Performance

Very Weak

Over the last 90 days Life Healthcare has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Allied Electronics

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Allied Electronics are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Allied Electronics is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Life Healthcare and Allied Electronics

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

The idea behind Life Healthcare and Allied Electronics 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.