Correlation Between Legg Mason and Prudential Government

Can any of the company-specific risk be diversified away by investing in both Legg Mason and Prudential Government 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 Legg Mason and Prudential Government into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Legg Mason Partners and Prudential Government Income, you can compare the effects of market volatilities on Legg Mason and Prudential Government 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 Legg Mason with a short position of Prudential Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of Legg Mason and Prudential Government.

Diversification Opportunities for Legg Mason and Prudential Government

-0.75

Correlation Coefficient

Legg Mason  Prudential Government

Pay attention - limited upside

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

Pair Corralation between Legg Mason and Prudential Government

Assuming the 90 days trading horizon Legg Mason Partners is expected to generate 1.84 times more return on investment than Prudential Government. However, Legg Mason is 1.84 times more volatile than Prudential Government Income. It trades about 0.31 of its potential returns per unit of risk. Prudential Government Income is currently generating about 0.05 per unit of risk. If you would invest  2,336  in Legg Mason Partners on September 5, 2024 and sell it today you would earn a total of  112.00  from holding Legg Mason Partners or generate 4.79% return on investment over 90 days.

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

Legg Mason Partners  vs.  Prudential Government Income

Legg Mason Partners

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Legg Mason Partners are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Legg Mason may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Prudential Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prudential Government Income has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Prudential Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Legg Mason and Prudential Government

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

The idea behind Legg Mason Partners and Prudential Government Income 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.