Correlation Between Cloudflare and DigitalOcean Holdings

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

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

Diversification Opportunities for Cloudflare and DigitalOcean Holdings

0.76

Correlation Coefficient

Cloudflare  DigitalOcean Holdings

Poor diversification

The 3 months correlation between Cloudflare and DigitalOcean is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Cloudflare and DigitalOcean Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DigitalOcean Holdings and Cloudflare 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 Cloudflare are associated (or correlated) with DigitalOcean Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DigitalOcean Holdings has no effect on the direction of Cloudflare i.e., Cloudflare and DigitalOcean Holdings go up and down completely randomly.

Pair Corralation between Cloudflare and DigitalOcean Holdings

Considering the 90-day investment horizon Cloudflare is expected to generate 1.14 times more return on investment than DigitalOcean Holdings. However, Cloudflare is 1.14 times more volatile than DigitalOcean Holdings. It trades about 0.21 of its potential returns per unit of risk. DigitalOcean Holdings is currently generating about 0.05 per unit of risk. If you would invest  9,983  in Cloudflare on November 28, 2024 and sell it today you would earn a total of  4,817  from holding Cloudflare or generate 48.25% return on investment over 90 days.

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

Cloudflare  vs.  DigitalOcean Holdings

Cloudflare

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cloudflare are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal technical and fundamental indicators, Cloudflare unveiled solid returns over the last few months and may actually be approaching a breakup point.

DigitalOcean Holdings

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in DigitalOcean Holdings are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, DigitalOcean Holdings may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Cloudflare and DigitalOcean Holdings

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

The idea behind Cloudflare and DigitalOcean Holdings 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.