Correlation Between LOreal Co and ELF Beauty

Can any of the company-specific risk be diversified away by investing in both LOreal Co and ELF Beauty 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 LOreal Co and ELF Beauty into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between LOreal Co ADR and ELF Beauty, you can compare the effects of market volatilities on LOreal Co and ELF Beauty 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 LOreal Co with a short position of ELF Beauty. Check out your portfolio center. Please also check ongoing floating volatility patterns of LOreal Co and ELF Beauty.

Diversification Opportunities for LOreal Co and ELF Beauty

-0.67

Correlation Coefficient

LOreal Co  ELF Beauty

Excellent diversification

The 3 months correlation between LOreal and ELF is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding LOreal Co ADR and ELF Beauty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ELF Beauty and LOreal Co 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 LOreal Co ADR are associated (or correlated) with ELF Beauty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ELF Beauty has no effect on the direction of LOreal Co i.e., LOreal Co and ELF Beauty go up and down completely randomly.

Pair Corralation between LOreal Co and ELF Beauty

Assuming the 90 days horizon LOreal Co ADR is expected to under-perform the ELF Beauty. But the pink sheet apears to be less risky and, when comparing its historical volatility, LOreal Co ADR is 1.8 times less risky than ELF Beauty. The pink sheet trades about -0.09 of its potential returns per unit of risk. The ELF Beauty is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  11,243  in ELF Beauty on September 17, 2024 and sell it today you would earn a total of  2,784  from holding ELF Beauty or generate 24.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

LOreal Co ADR  vs.  ELF Beauty

LOreal Co ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal Co ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

ELF Beauty

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ELF Beauty are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, ELF Beauty reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with LOreal Co and ELF Beauty

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

The idea behind LOreal Co ADR and ELF Beauty 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.