Correlation Between Pearson PLC and Seven Arts

Can any of the company-specific risk be diversified away by investing in both Pearson PLC and Seven Arts 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 Pearson PLC and Seven Arts into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Pearson PLC ADR and Seven Arts Entertainment, you can compare the effects of market volatilities on Pearson PLC and Seven Arts 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 Pearson PLC with a short position of Seven Arts. Check out your portfolio center. Please also check ongoing floating volatility patterns of Pearson PLC and Seven Arts.

Diversification Opportunities for Pearson PLC and Seven Arts

-0.4

Correlation Coefficient

Pearson PLC  Seven Arts

Very good diversification

The 3 months correlation between Pearson and Seven is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Pearson PLC ADR and Seven Arts Entertainment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Seven Arts Entertainment and Pearson PLC 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 Pearson PLC ADR are associated (or correlated) with Seven Arts. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Seven Arts Entertainment has no effect on the direction of Pearson PLC i.e., Pearson PLC and Seven Arts go up and down completely randomly.

Pair Corralation between Pearson PLC and Seven Arts

Considering the 90-day investment horizon Pearson PLC is expected to generate 9.97 times less return on investment than Seven Arts. But when comparing it to its historical volatility, Pearson PLC ADR is 21.34 times less risky than Seven Arts. It trades about 0.11 of its potential returns per unit of risk. Seven Arts Entertainment is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  0.04  in Seven Arts Entertainment on October 5, 2024 and sell it today you would lose (0.01) from holding Seven Arts Entertainment or give up 25.0% of portfolio value over 90 days.

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

Pearson PLC ADR  vs.  Seven Arts Entertainment

Pearson PLC ADR

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Pearson PLC ADR are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Pearson PLC displayed solid returns over the last few months and may actually be approaching a breakup point.

Seven Arts Entertainment

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Seven Arts Entertainment are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Seven Arts showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Pearson PLC and Seven Arts

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

The idea behind Pearson PLC ADR and Seven Arts Entertainment 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.

Check out your portfolio center.

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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.