Correlation Between L’Oreal Co and Shiseido Company

Can any of the company-specific risk be diversified away by investing in both L’Oreal Co and Shiseido Company 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 L’Oreal Co and Shiseido Company 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 Shiseido Company, you can compare the effects of market volatilities on L’Oreal Co and Shiseido Company 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 L’Oreal Co with a short position of Shiseido Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of L’Oreal Co and Shiseido Company.

Diversification Opportunities for L’Oreal Co and Shiseido Company

0.69

Correlation Coefficient

L’Oreal Co  Shiseido Company

Poor diversification

The 3 months correlation between L’Oreal and Shiseido is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding LOreal Co ADR and Shiseido Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shiseido Company and L’Oreal 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 Shiseido Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shiseido Company has no effect on the direction of L’Oreal Co i.e., L’Oreal Co and Shiseido Company go up and down completely randomly.

Pair Corralation between L’Oreal Co and Shiseido Company

Assuming the 90 days horizon L’Oreal Co is expected to generate 2.5 times less return on investment than Shiseido Company. But when comparing it to its historical volatility, LOreal Co ADR is 1.72 times less risky than Shiseido Company. It trades about 0.03 of its potential returns per unit of risk. Shiseido Company is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  1,790  in Shiseido Company on December 27, 2024 and sell it today you would earn a total of  98.00  from holding Shiseido Company or generate 5.47% return on investment over 90 days.

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

LOreal Co ADR  vs.  Shiseido Company

LOreal Co ADR

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in LOreal Co ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong fundamental indicators, L’Oreal Co is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Shiseido Company

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Shiseido Company are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Shiseido Company may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with L’Oreal Co and Shiseido Company

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

The idea behind LOreal Co ADR and Shiseido Company 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..