Correlation Between Melrose Industries and Smith Douglas

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

By analyzing existing cross correlation between Melrose Industries PLC and Smith Douglas Homes, you can compare the effects of market volatilities on Melrose Industries and Smith Douglas 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 Melrose Industries with a short position of Smith Douglas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Melrose Industries and Smith Douglas.

Diversification Opportunities for Melrose Industries and Smith Douglas

-0.55

Correlation Coefficient

Melrose Industries  Smith Douglas

Excellent diversification

The 3 months correlation between Melrose and Smith is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Melrose Industries PLC and Smith Douglas Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Douglas Homes and Melrose Industries 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 Melrose Industries PLC are associated (or correlated) with Smith Douglas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Douglas Homes has no effect on the direction of Melrose Industries i.e., Melrose Industries and Smith Douglas go up and down completely randomly.

Pair Corralation between Melrose Industries and Smith Douglas

Assuming the 90 days horizon Melrose Industries PLC is expected to generate 7.01 times more return on investment than Smith Douglas. However, Melrose Industries is 7.01 times more volatile than Smith Douglas Homes. It trades about 0.1 of its potential returns per unit of risk. Smith Douglas Homes is currently generating about 0.02 per unit of risk. If you would invest  351.00  in Melrose Industries PLC on October 4, 2024 and sell it today you would earn a total of  362.00  from holding Melrose Industries PLC or generate 103.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	68.8%
Values	Daily Returns

Melrose Industries PLC  vs.  Smith Douglas Homes

Melrose Industries PLC

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Melrose Industries PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Melrose Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Smith Douglas Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Douglas Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's technical indicators remain rather sound which may send shares a bit higher in February 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Melrose Industries and Smith Douglas

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

The idea behind Melrose Industries PLC and Smith Douglas Homes 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.