Correlation Between Southern and Rightsmile

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

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

Diversification Opportunities for Southern and Rightsmile

0.04

Correlation Coefficient

Southern  Rightsmile

Significant diversification

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

Pair Corralation between Southern and Rightsmile

Allowing for the 90-day total investment horizon Southern is expected to generate 1980.63 times less return on investment than Rightsmile. But when comparing it to its historical volatility, Southern Company is 224.6 times less risky than Rightsmile. It trades about 0.02 of its potential returns per unit of risk. Rightsmile is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  0.01  in Rightsmile on September 3, 2024 and sell it today you would earn a total of  0.00  from holding Rightsmile or generate 0.0% return on investment over 90 days.

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

Southern Company  vs.  Rightsmile

Southern

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Company are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Southern is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Rightsmile

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rightsmile are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite fairly conflicting technical and fundamental indicators, Rightsmile demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southern and Rightsmile

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

The idea behind Southern Company and Rightsmile 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.