Correlation Between Pearson PLC and Timken

Can any of the company-specific risk be diversified away by investing in both Pearson PLC and Timken 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 Timken 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 Timken Company, you can compare the effects of market volatilities on Pearson PLC and Timken 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 Timken. Check out your portfolio center. Please also check ongoing floating volatility patterns of Pearson PLC and Timken.

Diversification Opportunities for Pearson PLC and Timken

0.6

Correlation Coefficient

Pearson PLC  Timken

Poor diversification

The 3 months correlation between Pearson and Timken is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Pearson PLC ADR and Timken Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Timken Company 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 Timken. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Timken Company has no effect on the direction of Pearson PLC i.e., Pearson PLC and Timken go up and down completely randomly.

Pair Corralation between Pearson PLC and Timken

Considering the 90-day investment horizon Pearson PLC is expected to generate 8.86 times less return on investment than Timken. But when comparing it to its historical volatility, Pearson PLC ADR is 1.16 times less risky than Timken. It trades about 0.01 of its potential returns per unit of risk. Timken Company is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  7,118  in Timken Company on December 27, 2024 and sell it today you would earn a total of  261.00  from holding Timken Company or generate 3.67% return on investment over 90 days.

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

Pearson PLC ADR  vs.  Timken Company

Pearson PLC ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pearson PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Pearson PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Timken Company

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Timken Company are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable forward-looking signals, Timken is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Pearson PLC and Timken

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

The idea behind Pearson PLC ADR and Timken Company 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.