Correlation Between MetLife and Prudential Financial

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

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

Diversification Opportunities for MetLife and Prudential Financial

0.81

Correlation Coefficient

MetLife  Prudential Financial

Very poor diversification

The 3 months correlation between MetLife and Prudential is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding MetLife and Prudential Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Financial and MetLife 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 MetLife are associated (or correlated) with Prudential Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Financial has no effect on the direction of MetLife i.e., MetLife and Prudential Financial go up and down completely randomly.

Pair Corralation between MetLife and Prudential Financial

Assuming the 90 days trading horizon MetLife is expected to under-perform the Prudential Financial. But the stock apears to be less risky and, when comparing its historical volatility, MetLife is 1.07 times less risky than Prudential Financial. The stock trades about -0.05 of its potential returns per unit of risk. The Prudential Financial is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  37,481  in Prudential Financial on September 26, 2024 and sell it today you would earn a total of  1,009  from holding Prudential Financial or generate 2.69% return on investment over 90 days.

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

MetLife  vs.  Prudential Financial

MetLife

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MetLife are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, MetLife sustained solid returns over the last few months and may actually be approaching a breakup point.

Prudential Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MetLife and Prudential Financial

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

The idea behind MetLife and Prudential Financial 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.