Correlation Between Stepan and Western Acquisition

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

By analyzing existing cross correlation between Stepan Company and Western Acquisition Ventures, you can compare the effects of market volatilities on Stepan and Western Acquisition 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 Western Acquisition. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and Western Acquisition.

Diversification Opportunities for Stepan and Western Acquisition

0.04

Correlation Coefficient

Stepan  Western Acquisition

Significant diversification

The 3 months correlation between Stepan and Western is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and Western Acquisition Ventures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Acquisition 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 Western Acquisition. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Acquisition has no effect on the direction of Stepan i.e., Stepan and Western Acquisition go up and down completely randomly.

Pair Corralation between Stepan and Western Acquisition

Considering the 90-day investment horizon Stepan Company is expected to under-perform the Western Acquisition. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 1.09 times less risky than Western Acquisition. The stock trades about -0.14 of its potential returns per unit of risk. The Western Acquisition Ventures is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  1,076  in Western Acquisition Ventures on October 4, 2024 and sell it today you would lose (9.00) from holding Western Acquisition Ventures or give up 0.84% of portfolio value over 90 days.

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

Stepan Company  vs.  Western Acquisition Ventures

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.

Western Acquisition

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Western Acquisition Ventures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Western Acquisition is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Stepan and Western Acquisition

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

The idea behind Stepan Company and Western Acquisition Ventures 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.