Correlation Between North American and Leading Edge

Can any of the company-specific risk be diversified away by investing in both North American and Leading Edge 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 Leading Edge 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 Leading Edge Materials, you can compare the effects of market volatilities on North American and Leading Edge 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 Leading Edge. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Leading Edge.

Diversification Opportunities for North American and Leading Edge

-0.77

Correlation Coefficient

North American  Leading Edge

Pay attention - limited upside

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

Pair Corralation between North American and Leading Edge

Assuming the 90 days trading horizon North American Construction is expected to generate 0.36 times more return on investment than Leading Edge. However, North American Construction is 2.74 times less risky than Leading Edge. It trades about 0.15 of its potential returns per unit of risk. Leading Edge Materials is currently generating about -0.01 per unit of risk. If you would invest  2,862  in North American Construction on October 9, 2024 and sell it today you would earn a total of  257.00  from holding North American Construction or generate 8.98% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	97.5%
Values	Daily Returns

North American Construction  vs.  Leading Edge Materials

North American Const

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 11 (%) 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.

Leading Edge Materials

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Leading Edge Materials are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Leading Edge is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with North American and Leading Edge

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

The idea behind North American Construction and Leading Edge Materials 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.