Correlation Between M Food and Echo Investment

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

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

Diversification Opportunities for M Food and Echo Investment

-0.52

Correlation Coefficient

M Food  Echo Investment

Excellent diversification

The 3 months correlation between MFD and Echo is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding M Food SA and Echo Investment SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Echo Investment SA and M Food 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 M Food SA are associated (or correlated) with Echo Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Echo Investment SA has no effect on the direction of M Food i.e., M Food and Echo Investment go up and down completely randomly.

Pair Corralation between M Food and Echo Investment

Assuming the 90 days trading horizon M Food SA is expected to generate 2.59 times more return on investment than Echo Investment. However, M Food is 2.59 times more volatile than Echo Investment SA. It trades about 0.07 of its potential returns per unit of risk. Echo Investment SA is currently generating about 0.08 per unit of risk. If you would invest  105.00  in M Food SA on September 5, 2024 and sell it today you would earn a total of  8.00  from holding M Food SA or generate 7.62% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	57.14%
Values	Daily Returns

M Food SA  vs.  Echo Investment SA

M Food SA

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days M Food SA has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively weak basic indicators, M Food reported solid returns over the last few months and may actually be approaching a breakup point.

Echo Investment SA

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Echo Investment SA are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Echo Investment may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with M Food and Echo Investment

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

The idea behind M Food SA and Echo Investment SA 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.

Check out your portfolio center.

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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.