Correlation Between Morningstar and London Stock

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

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

Diversification Opportunities for Morningstar and London Stock

0.02

Correlation Coefficient

Morningstar  London Stock

Significant diversification

The 3 months correlation between Morningstar and London is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange and Morningstar 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 Morningstar are associated (or correlated) with London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of Morningstar i.e., Morningstar and London Stock go up and down completely randomly.

Pair Corralation between Morningstar and London Stock

Given the investment horizon of 90 days Morningstar is expected to under-perform the London Stock. But the stock apears to be less risky and, when comparing its historical volatility, Morningstar is 1.18 times less risky than London Stock. The stock trades about -0.14 of its potential returns per unit of risk. The London Stock Exchange is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,583  in London Stock Exchange on December 28, 2024 and sell it today you would earn a total of  134.00  from holding London Stock Exchange or generate 3.74% return on investment over 90 days.

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

Morningstar  vs.  London Stock Exchange

Morningstar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Morningstar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

London Stock Exchange

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, London Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Morningstar and London Stock

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

The idea behind Morningstar and London Stock Exchange 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.