Correlation Between Sonata Software and Touchwood Entertainment

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

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

Diversification Opportunities for Sonata Software and Touchwood Entertainment

0.62

Correlation Coefficient

Sonata Software  Touchwood Entertainment

Poor diversification

The 3 months correlation between Sonata and Touchwood is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Sonata Software Limited and Touchwood Entertainment Limite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Touchwood Entertainment and Sonata Software 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 Sonata Software Limited are associated (or correlated) with Touchwood Entertainment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Touchwood Entertainment has no effect on the direction of Sonata Software i.e., Sonata Software and Touchwood Entertainment go up and down completely randomly.

Pair Corralation between Sonata Software and Touchwood Entertainment

Assuming the 90 days trading horizon Sonata Software Limited is expected to generate 0.97 times more return on investment than Touchwood Entertainment. However, Sonata Software Limited is 1.03 times less risky than Touchwood Entertainment. It trades about -0.08 of its potential returns per unit of risk. Touchwood Entertainment Limited is currently generating about -0.27 per unit of risk. If you would invest  61,630  in Sonata Software Limited on October 26, 2024 and sell it today you would lose (2,520) from holding Sonata Software Limited or give up 4.09% of portfolio value over 90 days.

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

Sonata Software Limited  vs.  Touchwood Entertainment Limite

Sonata Software

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sonata Software Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, Sonata Software is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Touchwood Entertainment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Touchwood Entertainment Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Touchwood Entertainment is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Sonata Software and Touchwood Entertainment

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

The idea behind Sonata Software Limited and Touchwood Entertainment Limited 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.