Correlation Between Stepan and Bowhead Specialty

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

By analyzing existing cross correlation between Stepan Company and Bowhead Specialty Holdings, you can compare the effects of market volatilities on Stepan and Bowhead Specialty 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 Stepan with a short position of Bowhead Specialty. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and Bowhead Specialty.

Diversification Opportunities for Stepan and Bowhead Specialty

-0.12

Correlation Coefficient

Stepan  Bowhead Specialty

Good diversification

The 3 months correlation between Stepan and Bowhead is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and Bowhead Specialty Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bowhead Specialty and Stepan 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 Stepan Company are associated (or correlated) with Bowhead Specialty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bowhead Specialty has no effect on the direction of Stepan i.e., Stepan and Bowhead Specialty go up and down completely randomly.

Pair Corralation between Stepan and Bowhead Specialty

Considering the 90-day investment horizon Stepan Company is expected to under-perform the Bowhead Specialty. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 1.35 times less risky than Bowhead Specialty. The stock trades about -0.58 of its potential returns per unit of risk. The Bowhead Specialty Holdings is currently generating about -0.29 of returns per unit of risk over similar time horizon. If you would invest  3,780  in Bowhead Specialty Holdings on October 6, 2024 and sell it today you would lose (395.00) from holding Bowhead Specialty Holdings or give up 10.45% of portfolio value over 90 days.

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

Stepan Company  vs.  Bowhead Specialty Holdings

Stepan Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Stepan Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental indicators remain quite persistent which may send shares a bit higher in February 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Bowhead Specialty

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bowhead Specialty Holdings are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Bowhead Specialty showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Stepan and Bowhead Specialty

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

The idea behind Stepan Company and Bowhead Specialty Holdings 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.