Correlation Between Mazda and Melrose Industries

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

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

Diversification Opportunities for Mazda and Melrose Industries

-0.77

Correlation Coefficient

Mazda  Melrose Industries

Pay attention - limited upside

The 3 months correlation between Mazda and Melrose is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding Mazda Motor and Melrose Industries PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melrose Industries PLC and Mazda 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 Mazda Motor are associated (or correlated) with Melrose Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melrose Industries PLC has no effect on the direction of Mazda i.e., Mazda and Melrose Industries go up and down completely randomly.

Pair Corralation between Mazda and Melrose Industries

Assuming the 90 days horizon Mazda is expected to generate 32.52 times less return on investment than Melrose Industries. But when comparing it to its historical volatility, Mazda Motor is 5.68 times less risky than Melrose Industries. It trades about 0.02 of its potential returns per unit of risk. Melrose Industries PLC is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  311.00  in Melrose Industries PLC on September 25, 2024 and sell it today you would earn a total of  370.00  from holding Melrose Industries PLC or generate 118.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	87.62%
Values	Daily Returns

Mazda Motor  vs.  Melrose Industries PLC

Mazda Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mazda Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Melrose Industries PLC

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Melrose Industries PLC are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Melrose Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Mazda and Melrose Industries

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

The idea behind Mazda Motor and Melrose Industries PLC 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.