Correlation Between THE PHILIPPINE and SBF 120

Can any of the company-specific risk be diversified away by investing in both THE PHILIPPINE and SBF 120 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 THE PHILIPPINE and SBF 120 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between THE PHILIPPINE STOCK and SBF 120, you can compare the effects of market volatilities on THE PHILIPPINE and SBF 120 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 THE PHILIPPINE with a short position of SBF 120. Check out your portfolio center. Please also check ongoing floating volatility patterns of THE PHILIPPINE and SBF 120.

Diversification Opportunities for THE PHILIPPINE and SBF 120

0.75

Correlation Coefficient

THE PHILIPPINE  SBF 120

Poor diversification

The 3 months correlation between THE and SBF is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding THE PHILIPPINE STOCK and SBF 120 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SBF 120 and THE PHILIPPINE 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 THE PHILIPPINE STOCK are associated (or correlated) with SBF 120. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SBF 120 has no effect on the direction of THE PHILIPPINE i.e., THE PHILIPPINE and SBF 120 go up and down completely randomly.

Pair Corralation between THE PHILIPPINE and SBF 120

Assuming the 90 days trading horizon THE PHILIPPINE STOCK is expected to generate 1.14 times more return on investment than SBF 120. However, THE PHILIPPINE is 1.14 times more volatile than SBF 120. It trades about 0.02 of its potential returns per unit of risk. SBF 120 is currently generating about -0.08 per unit of risk. If you would invest  647,074  in THE PHILIPPINE STOCK on September 1, 2024 and sell it today you would earn a total of  14,311  from holding THE PHILIPPINE STOCK or generate 2.21% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	94.66%
Values	Daily Returns

THE PHILIPPINE STOCK  vs.  SBF 120

Pair Trading with THE PHILIPPINE and SBF 120

The main advantage of trading using opposite THE PHILIPPINE and SBF 120 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if THE PHILIPPINE position performs unexpectedly, SBF 120 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 SBF 120 will offset losses from the drop in SBF 120's long position.

The idea behind THE PHILIPPINE STOCK and SBF 120 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.