Correlation Between Lowes Companies and Wesfarmers

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

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

Diversification Opportunities for Lowes Companies and Wesfarmers

0.52

Correlation Coefficient

Lowes Companies  Wesfarmers

Very weak diversification

The 3 months correlation between Lowes and Wesfarmers is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Lowes Companies and Wesfarmers Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers Limited and Lowes Companies 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 Lowes Companies are associated (or correlated) with Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers Limited has no effect on the direction of Lowes Companies i.e., Lowes Companies and Wesfarmers go up and down completely randomly.

Pair Corralation between Lowes Companies and Wesfarmers

Assuming the 90 days horizon Lowes Companies is expected to generate 0.7 times more return on investment than Wesfarmers. However, Lowes Companies is 1.43 times less risky than Wesfarmers. It trades about -0.11 of its potential returns per unit of risk. Wesfarmers Limited is currently generating about -0.09 per unit of risk. If you would invest  24,835  in Lowes Companies on September 22, 2024 and sell it today you would lose (835.00) from holding Lowes Companies or give up 3.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.65%
Values	Daily Returns

Lowes Companies  vs.  Wesfarmers Limited

Lowes Companies

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Lowes Companies are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Lowes Companies is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Wesfarmers Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wesfarmers Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Wesfarmers is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Lowes Companies and Wesfarmers

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

The idea behind Lowes Companies and Wesfarmers Limited 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 Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.