Correlation Between Plaza SA and LATAM Airlines

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

By analyzing existing cross correlation between Plaza SA and LATAM Airlines Group, you can compare the effects of market volatilities on Plaza SA and LATAM Airlines 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 Plaza SA with a short position of LATAM Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Plaza SA and LATAM Airlines.

Diversification Opportunities for Plaza SA and LATAM Airlines

0.27

Correlation Coefficient

Plaza SA  LATAM Airlines

Modest diversification

The 3 months correlation between Plaza and LATAM is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Plaza SA and LATAM Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LATAM Airlines Group and Plaza SA 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 Plaza SA are associated (or correlated) with LATAM Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LATAM Airlines Group has no effect on the direction of Plaza SA i.e., Plaza SA and LATAM Airlines go up and down completely randomly.

Pair Corralation between Plaza SA and LATAM Airlines

Assuming the 90 days trading horizon Plaza SA is expected to generate 0.77 times more return on investment than LATAM Airlines. However, Plaza SA is 1.3 times less risky than LATAM Airlines. It trades about 0.19 of its potential returns per unit of risk. LATAM Airlines Group is currently generating about 0.11 per unit of risk. If you would invest  157,310  in Plaza SA on September 4, 2024 and sell it today you would earn a total of  8,190  from holding Plaza SA or generate 5.21% return on investment over 90 days.

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

Plaza SA  vs.  LATAM Airlines Group

Plaza SA

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Plaza SA are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating essential indicators, Plaza SA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

LATAM Airlines Group

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in LATAM Airlines Group are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting primary indicators, LATAM Airlines displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Plaza SA and LATAM Airlines

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

The idea behind Plaza SA and LATAM Airlines Group 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.