Correlation Between 3M and Verizon Communications

Can any of the company-specific risk be diversified away by investing in both 3M and Verizon 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 3M and Verizon Communications into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and Verizon Communications, you can compare the effects of market volatilities on 3M and Verizon 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 3M with a short position of Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and Verizon Communications.

Diversification Opportunities for 3M and Verizon Communications

0.32

Correlation Coefficient

3M  Verizon Communications

Weak diversification

The 3 months correlation between 3M and Verizon is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and 3M 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 3M Company are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of 3M i.e., 3M and Verizon Communications go up and down completely randomly.

Pair Corralation between 3M and Verizon Communications

Assuming the 90 days trading horizon 3M Company is expected to generate 1.27 times more return on investment than Verizon Communications. However, 3M is 1.27 times more volatile than Verizon Communications. It trades about 0.12 of its potential returns per unit of risk. Verizon Communications is currently generating about 0.05 per unit of risk. If you would invest  187,410  in 3M Company on September 29, 2024 and sell it today you would earn a total of  75,590  from holding 3M Company or generate 40.33% return on investment over 90 days.

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

3M Company  vs.  Verizon Communications

3M Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days 3M Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, 3M is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with 3M and Verizon Communications

The main advantage of trading using opposite 3M and Verizon Communications positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, Verizon 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 Verizon Communications will offset losses from the drop in Verizon Communications' long position.

The idea behind 3M Company and Verizon 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.

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.