Correlation Between Pure Cycle and California Water

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

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

Diversification Opportunities for Pure Cycle and California Water

0.8

Correlation Coefficient

Pure Cycle  California Water

Very poor diversification

The 3 months correlation between Pure and California is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Pure Cycle and California Water Service in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Water Service and Pure Cycle 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 Pure Cycle are associated (or correlated) with California Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Water Service has no effect on the direction of Pure Cycle i.e., Pure Cycle and California Water go up and down completely randomly.

Pair Corralation between Pure Cycle and California Water

Given the investment horizon of 90 days Pure Cycle is expected to under-perform the California Water. In addition to that, Pure Cycle is 1.31 times more volatile than California Water Service. It trades about -0.2 of its total potential returns per unit of risk. California Water Service is currently generating about -0.08 per unit of volatility. If you would invest  5,084  in California Water Service on November 28, 2024 and sell it today you would lose (387.00) from holding California Water Service or give up 7.61% of portfolio value over 90 days.

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

Pure Cycle  vs.  California Water Service

Pure Cycle

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pure Cycle has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in March 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

California Water Service

Risk-Adjusted Performance

Very Weak

Over the last 90 days California Water Service has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Pure Cycle and California Water

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

The idea behind Pure Cycle and California Water Service 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.