Correlation Between Royal Orchid and Fairchem Organics

Can any of the company-specific risk be diversified away by investing in both Royal Orchid and Fairchem Organics 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 Royal Orchid and Fairchem Organics into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Royal Orchid Hotels and Fairchem Organics Limited, you can compare the effects of market volatilities on Royal Orchid and Fairchem Organics 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 Royal Orchid with a short position of Fairchem Organics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royal Orchid and Fairchem Organics.

Diversification Opportunities for Royal Orchid and Fairchem Organics

0.52

Correlation Coefficient

Royal Orchid  Fairchem Organics

Very weak diversification

The 3 months correlation between Royal and Fairchem is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Royal Orchid Hotels and Fairchem Organics Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fairchem Organics and Royal Orchid 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 Royal Orchid Hotels are associated (or correlated) with Fairchem Organics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fairchem Organics has no effect on the direction of Royal Orchid i.e., Royal Orchid and Fairchem Organics go up and down completely randomly.

Pair Corralation between Royal Orchid and Fairchem Organics

Assuming the 90 days trading horizon Royal Orchid Hotels is expected to generate 0.49 times more return on investment than Fairchem Organics. However, Royal Orchid Hotels is 2.03 times less risky than Fairchem Organics. It trades about -0.01 of its potential returns per unit of risk. Fairchem Organics Limited is currently generating about -0.02 per unit of risk. If you would invest  36,015  in Royal Orchid Hotels on October 13, 2024 and sell it today you would lose (1,350) from holding Royal Orchid Hotels or give up 3.75% of portfolio value over 90 days.

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

Royal Orchid Hotels  vs.  Fairchem Organics Limited

Royal Orchid Hotels

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Royal Orchid Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong essential indicators, Royal Orchid is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Fairchem Organics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Fairchem Organics Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, Fairchem Organics is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Royal Orchid and Fairchem Organics

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

The idea behind Royal Orchid Hotels and Fairchem Organics Limited 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.