Correlation Between Morgan Stanley and ACME Lithium

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

By analyzing existing cross correlation between Morgan Stanley Direct and ACME Lithium, you can compare the effects of market volatilities on Morgan Stanley and ACME Lithium 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 Morgan Stanley with a short position of ACME Lithium. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morgan Stanley and ACME Lithium.

Diversification Opportunities for Morgan Stanley and ACME Lithium

0.36

Correlation Coefficient

Morgan Stanley  ACME Lithium

Weak diversification

The 3 months correlation between Morgan and ACME is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Morgan Stanley Direct and ACME Lithium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ACME Lithium and Morgan Stanley 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 Morgan Stanley Direct are associated (or correlated) with ACME Lithium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ACME Lithium has no effect on the direction of Morgan Stanley i.e., Morgan Stanley and ACME Lithium go up and down completely randomly.

Pair Corralation between Morgan Stanley and ACME Lithium

Given the investment horizon of 90 days Morgan Stanley is expected to generate 335.86 times less return on investment than ACME Lithium. But when comparing it to its historical volatility, Morgan Stanley Direct is 20.62 times less risky than ACME Lithium. It trades about 0.01 of its potential returns per unit of risk. ACME Lithium is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2.40  in ACME Lithium on December 27, 2024 and sell it today you would earn a total of  0.40  from holding ACME Lithium or generate 16.67% return on investment over 90 days.

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

Morgan Stanley Direct  vs.  ACME Lithium

Morgan Stanley Direct

Risk-Adjusted Performance

Very Weak

Over the last 90 days Morgan Stanley Direct has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Morgan Stanley is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

ACME Lithium

Risk-Adjusted Performance

OK

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

Pair Trading with Morgan Stanley and ACME Lithium

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

The idea behind Morgan Stanley Direct and ACME Lithium 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.