Correlation Between Major Drilling and Dream Office

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

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

Diversification Opportunities for Major Drilling and Dream Office

0.62

Correlation Coefficient

Major Drilling  Dream Office

Poor diversification

The 3 months correlation between Major and Dream is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Major Drilling Group and Dream Office Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dream Office Real and Major 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 Major Drilling Group are associated (or correlated) with Dream Office. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dream Office Real has no effect on the direction of Major Drilling i.e., Major Drilling and Dream Office go up and down completely randomly.

Pair Corralation between Major Drilling and Dream Office

Assuming the 90 days trading horizon Major Drilling Group is expected to under-perform the Dream Office. In addition to that, Major Drilling is 1.19 times more volatile than Dream Office Real. It trades about -0.04 of its total potential returns per unit of risk. Dream Office Real is currently generating about -0.01 per unit of volatility. If you would invest  1,810  in Dream Office Real on December 20, 2024 and sell it today you would lose (52.00) from holding Dream Office Real or give up 2.87% of portfolio value over 90 days.

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

Major Drilling Group  vs.  Dream Office Real

Major Drilling Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Major Drilling Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Major Drilling is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Dream Office Real

Risk-Adjusted Performance

Very Weak

Over the last 90 days Dream Office Real has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Dream Office is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Major Drilling and Dream Office

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

The idea behind Major Drilling Group and Dream Office Real 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.