Correlation Between National Australia and Aristocrat Leisure

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

By analyzing existing cross correlation between National Australia Bank and Aristocrat Leisure, you can compare the effects of market volatilities on National Australia and Aristocrat Leisure 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 National Australia with a short position of Aristocrat Leisure. Check out your portfolio center. Please also check ongoing floating volatility patterns of National Australia and Aristocrat Leisure.

Diversification Opportunities for National Australia and Aristocrat Leisure

0.59

Correlation Coefficient

National Australia  Aristocrat Leisure

Very weak diversification

The 3 months correlation between National and Aristocrat is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding National Australia Bank and Aristocrat Leisure in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aristocrat Leisure and National Australia 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 National Australia Bank are associated (or correlated) with Aristocrat Leisure. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aristocrat Leisure has no effect on the direction of National Australia i.e., National Australia and Aristocrat Leisure go up and down completely randomly.

Pair Corralation between National Australia and Aristocrat Leisure

Assuming the 90 days trading horizon National Australia is expected to generate 9.46 times less return on investment than Aristocrat Leisure. But when comparing it to its historical volatility, National Australia Bank is 4.81 times less risky than Aristocrat Leisure. It trades about 0.15 of its potential returns per unit of risk. Aristocrat Leisure is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  5,421  in Aristocrat Leisure on September 3, 2024 and sell it today you would earn a total of  1,354  from holding Aristocrat Leisure or generate 24.98% return on investment over 90 days.

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

National Australia Bank  vs.  Aristocrat Leisure

National Australia Bank

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in National Australia Bank are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, National Australia is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Aristocrat Leisure

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aristocrat Leisure are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak essential indicators, Aristocrat Leisure unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with National Australia and Aristocrat Leisure

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

The idea behind National Australia Bank and Aristocrat Leisure 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.