Correlation Between Reliance Steel and Shoprite Holdings

Can any of the company-specific risk be diversified away by investing in both Reliance Steel and Shoprite Holdings 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 Reliance Steel and Shoprite Holdings into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Reliance Steel Aluminum and Shoprite Holdings Limited, you can compare the effects of market volatilities on Reliance Steel and Shoprite Holdings 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 Reliance Steel with a short position of Shoprite Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Reliance Steel and Shoprite Holdings.

Diversification Opportunities for Reliance Steel and Shoprite Holdings

0.7

Correlation Coefficient

Reliance Steel  Shoprite Holdings

Poor diversification

The 3 months correlation between Reliance and Shoprite is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Steel Aluminum and Shoprite Holdings Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shoprite Holdings and Reliance Steel 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 Reliance Steel Aluminum are associated (or correlated) with Shoprite Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shoprite Holdings has no effect on the direction of Reliance Steel i.e., Reliance Steel and Shoprite Holdings go up and down completely randomly.

Pair Corralation between Reliance Steel and Shoprite Holdings

Assuming the 90 days horizon Reliance Steel is expected to generate 1.74 times less return on investment than Shoprite Holdings. But when comparing it to its historical volatility, Reliance Steel Aluminum is 2.16 times less risky than Shoprite Holdings. It trades about 0.15 of its potential returns per unit of risk. Shoprite Holdings Limited is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,118  in Shoprite Holdings Limited on August 30, 2024 and sell it today you would earn a total of  412.00  from holding Shoprite Holdings Limited or generate 36.85% return on investment over 90 days.

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

Reliance Steel Aluminum  vs.  Shoprite Holdings Limited

Reliance Steel Aluminum

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Reliance Steel Aluminum are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Reliance Steel reported solid returns over the last few months and may actually be approaching a breakup point.

Shoprite Holdings

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shoprite Holdings Limited are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Shoprite Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Reliance Steel and Shoprite Holdings

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

The idea behind Reliance Steel Aluminum and Shoprite Holdings 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.

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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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.