Correlation Between Melrose Industries and Western Digital

Can any of the company-specific risk be diversified away by investing in both Melrose Industries and Western Digital 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 Western Digital 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 Western Digital, you can compare the effects of market volatilities on Melrose Industries and Western Digital 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 Western Digital. Check out your portfolio center. Please also check ongoing floating volatility patterns of Melrose Industries and Western Digital.

Diversification Opportunities for Melrose Industries and Western Digital

0.14

Correlation Coefficient

Melrose Industries  Western Digital

Average diversification

The 3 months correlation between Melrose and Western is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Melrose Industries PLC and Western Digital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Digital 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 Western Digital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Digital has no effect on the direction of Melrose Industries i.e., Melrose Industries and Western Digital go up and down completely randomly.

Pair Corralation between Melrose Industries and Western Digital

Assuming the 90 days horizon Melrose Industries PLC is expected to generate 1.86 times more return on investment than Western Digital. However, Melrose Industries is 1.86 times more volatile than Western Digital. It trades about -0.08 of its potential returns per unit of risk. Western Digital is currently generating about -0.41 per unit of risk. If you would invest  773.00  in Melrose Industries PLC on October 4, 2024 and sell it today you would lose (60.00) from holding Melrose Industries PLC or give up 7.76% of portfolio value over 90 days.

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

Melrose Industries PLC  vs.  Western Digital

Melrose Industries PLC

Risk-Adjusted Performance

8 of 100

Modest

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.

Western Digital

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Western Digital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Melrose Industries and Western Digital

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

The idea behind Melrose Industries PLC and Western Digital 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.