Correlation Between SMA Solar and American Woodmark

Can any of the company-specific risk be diversified away by investing in both SMA Solar and American Woodmark 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 SMA Solar and American Woodmark into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SMA Solar Technology and American Woodmark, you can compare the effects of market volatilities on SMA Solar and American Woodmark 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 SMA Solar with a short position of American Woodmark. Check out your portfolio center. Please also check ongoing floating volatility patterns of SMA Solar and American Woodmark.

Diversification Opportunities for SMA Solar and American Woodmark

-0.34

Correlation Coefficient

SMA Solar  American Woodmark

Very good diversification

The 3 months correlation between SMA and American is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding SMA Solar Technology and American Woodmark in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Woodmark and SMA Solar 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 SMA Solar Technology are associated (or correlated) with American Woodmark. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Woodmark has no effect on the direction of SMA Solar i.e., SMA Solar and American Woodmark go up and down completely randomly.

Pair Corralation between SMA Solar and American Woodmark

Assuming the 90 days horizon SMA Solar Technology is expected to generate 1.75 times more return on investment than American Woodmark. However, SMA Solar is 1.75 times more volatile than American Woodmark. It trades about 0.11 of its potential returns per unit of risk. American Woodmark is currently generating about -0.45 per unit of risk. If you would invest  1,323  in SMA Solar Technology on September 27, 2024 and sell it today you would earn a total of  90.00  from holding SMA Solar Technology or generate 6.8% return on investment over 90 days.

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

SMA Solar Technology  vs.  American Woodmark

SMA Solar Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SMA Solar Technology has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

American Woodmark

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Woodmark has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, American Woodmark is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with SMA Solar and American Woodmark

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

The idea behind SMA Solar Technology and American Woodmark 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.