Correlation Between Principal Financial and Prospect Capital

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

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

Diversification Opportunities for Principal Financial and Prospect Capital

0.61

Correlation Coefficient

Principal Financial  Prospect Capital

Poor diversification

The 3 months correlation between Principal and Prospect is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Principal Financial Group and Prospect Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prospect Capital and Principal Financial 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 Principal Financial Group are associated (or correlated) with Prospect Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prospect Capital has no effect on the direction of Principal Financial i.e., Principal Financial and Prospect Capital go up and down completely randomly.

Pair Corralation between Principal Financial and Prospect Capital

Considering the 90-day investment horizon Principal Financial Group is expected to under-perform the Prospect Capital. In addition to that, Principal Financial is 1.2 times more volatile than Prospect Capital. It trades about -0.28 of its total potential returns per unit of risk. Prospect Capital is currently generating about -0.25 per unit of volatility. If you would invest  1,905  in Prospect Capital on September 22, 2024 and sell it today you would lose (113.00) from holding Prospect Capital or give up 5.93% of portfolio value over 90 days.

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

Principal Financial Group  vs.  Prospect Capital

Principal Financial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Principal Financial Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Prospect Capital

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prospect Capital has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Preferred Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Principal Financial and Prospect Capital

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

The idea behind Principal Financial Group and Prospect Capital 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.