Correlation Between Reckitt Benckiser and L’Oreal Co

Can any of the company-specific risk be diversified away by investing in both Reckitt Benckiser and L’Oreal Co 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 Reckitt Benckiser and L’Oreal Co into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Reckitt Benckiser Group and LOreal Co ADR, you can compare the effects of market volatilities on Reckitt Benckiser and L’Oreal Co 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 Reckitt Benckiser with a short position of L’Oreal Co. Check out your portfolio center. Please also check ongoing floating volatility patterns of Reckitt Benckiser and L’Oreal Co.

Diversification Opportunities for Reckitt Benckiser and L’Oreal Co

0.73

Correlation Coefficient

Reckitt Benckiser  L’Oreal Co

Poor diversification

The 3 months correlation between Reckitt and L’Oreal is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Reckitt Benckiser Group and LOreal Co ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LOreal Co ADR and Reckitt Benckiser 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 Reckitt Benckiser Group are associated (or correlated) with L’Oreal Co. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LOreal Co ADR has no effect on the direction of Reckitt Benckiser i.e., Reckitt Benckiser and L’Oreal Co go up and down completely randomly.

Pair Corralation between Reckitt Benckiser and L’Oreal Co

Assuming the 90 days horizon Reckitt Benckiser Group is expected to generate 0.71 times more return on investment than L’Oreal Co. However, Reckitt Benckiser Group is 1.42 times less risky than L’Oreal Co. It trades about 0.18 of its potential returns per unit of risk. LOreal Co ADR is currently generating about 0.07 per unit of risk. If you would invest  1,199  in Reckitt Benckiser Group on December 30, 2024 and sell it today you would earn a total of  157.00  from holding Reckitt Benckiser Group or generate 13.09% return on investment over 90 days.

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

Reckitt Benckiser Group  vs.  LOreal Co ADR

Reckitt Benckiser

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Reckitt Benckiser Group are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile essential indicators, Reckitt Benckiser showed solid returns over the last few months and may actually be approaching a breakup point.

LOreal Co ADR

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in LOreal Co ADR are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating fundamental indicators, L’Oreal Co may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Reckitt Benckiser and L’Oreal Co

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

The idea behind Reckitt Benckiser Group and LOreal Co ADR 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.