Correlation Between Smith Douglas and Allison

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

By analyzing existing cross correlation between Smith Douglas Homes and Allison Transmission 5875, you can compare the effects of market volatilities on Smith Douglas and Allison 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 Smith Douglas with a short position of Allison. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smith Douglas and Allison.

Diversification Opportunities for Smith Douglas and Allison

0.21

Correlation Coefficient

Smith Douglas  Allison

Modest diversification

The 3 months correlation between Smith and Allison is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Smith Douglas Homes and Allison Transmission 5875 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission 5875 and Smith Douglas 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 Smith Douglas Homes are associated (or correlated) with Allison. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission 5875 has no effect on the direction of Smith Douglas i.e., Smith Douglas and Allison go up and down completely randomly.

Pair Corralation between Smith Douglas and Allison

Given the investment horizon of 90 days Smith Douglas is expected to generate 41.53 times less return on investment than Allison. But when comparing it to its historical volatility, Smith Douglas Homes is 21.96 times less risky than Allison. It trades about 0.03 of its potential returns per unit of risk. Allison Transmission 5875 is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  9,511  in Allison Transmission 5875 on September 26, 2024 and sell it today you would earn a total of  377.00  from holding Allison Transmission 5875 or generate 3.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	53.44%
Values	Daily Returns

Smith Douglas Homes  vs.  Allison Transmission 5875

Smith Douglas Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Douglas Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's technical indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Allison Transmission 5875

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Allison Transmission 5875 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Allison is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Smith Douglas and Allison

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

The idea behind Smith Douglas Homes and Allison Transmission 5875 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 Global Correlations module to find global opportunities by holding instruments from different markets.