Correlation Between North American and Big Rock

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

By analyzing existing cross correlation between North American Construction and Big Rock Brewery, you can compare the effects of market volatilities on North American and Big Rock 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 North American with a short position of Big Rock. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Big Rock.

Diversification Opportunities for North American and Big Rock

-0.37

Correlation Coefficient

North American  Big Rock

Very good diversification

The 3 months correlation between North and Big is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Big Rock Brewery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Big Rock Brewery and North American 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 North American Construction are associated (or correlated) with Big Rock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Big Rock Brewery has no effect on the direction of North American i.e., North American and Big Rock go up and down completely randomly.

Pair Corralation between North American and Big Rock

Assuming the 90 days trading horizon North American is expected to generate 9.95 times less return on investment than Big Rock. But when comparing it to its historical volatility, North American Construction is 2.44 times less risky than Big Rock. It trades about 0.0 of its potential returns per unit of risk. Big Rock Brewery is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  125.00  in Big Rock Brewery on September 24, 2024 and sell it today you would lose (13.00) from holding Big Rock Brewery or give up 10.4% of portfolio value over 90 days.

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

North American Construction  vs.  Big Rock Brewery

North American Const

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, North American displayed solid returns over the last few months and may actually be approaching a breakup point.

Big Rock Brewery

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Big Rock Brewery has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Big Rock is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with North American and Big Rock

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

The idea behind North American Construction and Big Rock Brewery 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.