Correlation Between LOreal SA and Icape Holding

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

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

Diversification Opportunities for LOreal SA and Icape Holding

-0.08

Correlation Coefficient

LOreal SA  Icape Holding

Good diversification

The 3 months correlation between LOreal and Icape is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding LOreal SA and Icape Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Icape Holding and LOreal SA 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 LOreal SA are associated (or correlated) with Icape Holding. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Icape Holding has no effect on the direction of LOreal SA i.e., LOreal SA and Icape Holding go up and down completely randomly.

Pair Corralation between LOreal SA and Icape Holding

Assuming the 90 days horizon LOreal SA is expected to under-perform the Icape Holding. But the stock apears to be less risky and, when comparing its historical volatility, LOreal SA is 2.86 times less risky than Icape Holding. The stock trades about -0.01 of its potential returns per unit of risk. The Icape Holding is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  756.00  in Icape Holding on October 25, 2024 and sell it today you would earn a total of  144.00  from holding Icape Holding or generate 19.05% return on investment over 90 days.

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

LOreal SA  vs.  Icape Holding

LOreal SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, LOreal SA is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Icape Holding

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Icape Holding are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Icape Holding reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with LOreal SA and Icape Holding

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

The idea behind LOreal SA and Icape Holding 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.