Correlation Between Methode Electronics and Entravision Communications

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

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

Diversification Opportunities for Methode Electronics and Entravision Communications

0.33

Correlation Coefficient

Methode Electronics  Entravision Communications

Weak diversification

The 3 months correlation between Methode and Entravision is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Methode Electronics and Entravision Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Entravision Communications and Methode Electronics 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 Methode Electronics are associated (or correlated) with Entravision Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Entravision Communications has no effect on the direction of Methode Electronics i.e., Methode Electronics and Entravision Communications go up and down completely randomly.

Pair Corralation between Methode Electronics and Entravision Communications

Assuming the 90 days trading horizon Methode Electronics is expected to under-perform the Entravision Communications. In addition to that, Methode Electronics is 1.02 times more volatile than Entravision Communications. It trades about -0.02 of its total potential returns per unit of risk. Entravision Communications is currently generating about -0.01 per unit of volatility. If you would invest  347.00  in Entravision Communications on October 5, 2024 and sell it today you would lose (127.00) from holding Entravision Communications or give up 36.6% of portfolio value over 90 days.

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

Methode Electronics  vs.  Entravision Communications

Methode Electronics

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days Methode Electronics has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Methode Electronics reported solid returns over the last few months and may actually be approaching a breakup point.

Entravision Communications

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Entravision Communications has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Entravision Communications reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Methode Electronics and Entravision Communications

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

The idea behind Methode Electronics and Entravision Communications 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.