Correlation Between Master Drilling and Allied Electronics

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

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

Diversification Opportunities for Master Drilling and Allied Electronics

0.24

Correlation Coefficient

Master Drilling  Allied Electronics

Modest diversification

The 3 months correlation between Master and Allied is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Master Drilling Group and Allied Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allied Electronics and Master Drilling 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 Master Drilling Group 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 Master Drilling i.e., Master Drilling and Allied Electronics go up and down completely randomly.

Pair Corralation between Master Drilling and Allied Electronics

Assuming the 90 days trading horizon Master Drilling Group is expected to under-perform the Allied Electronics. In addition to that, Master Drilling is 1.82 times more volatile than Allied Electronics. It trades about -0.22 of its total potential returns per unit of risk. Allied Electronics is currently generating about 0.35 per unit of volatility. If you would invest  199,000  in Allied Electronics on September 24, 2024 and sell it today you would earn a total of  14,000  from holding Allied Electronics or generate 7.04% return on investment over 90 days.

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

Master Drilling Group  vs.  Allied Electronics

Master Drilling Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Master Drilling Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Master Drilling is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Allied Electronics

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Allied Electronics are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Allied Electronics exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Master Drilling and Allied Electronics

The main advantage of trading using opposite Master Drilling and Allied Electronics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Master Drilling 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 Master Drilling Group 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.