Correlation Between State Street and Applied Finance

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

By analyzing existing cross correlation between State Street Premier and Applied Finance Explorer, you can compare the effects of market volatilities on State Street and Applied Finance 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 State Street with a short position of Applied Finance. Check out your portfolio center. Please also check ongoing floating volatility patterns of State Street and Applied Finance.

Diversification Opportunities for State Street and Applied Finance

0.83

Correlation Coefficient

State Street  Applied Finance

Very poor diversification

The 3 months correlation between State and Applied is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding State Street Premier and Applied Finance Explorer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Finance Explorer and State Street 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 State Street Premier are associated (or correlated) with Applied Finance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Finance Explorer has no effect on the direction of State Street i.e., State Street and Applied Finance go up and down completely randomly.

Pair Corralation between State Street and Applied Finance

Assuming the 90 days horizon State Street Premier is expected to generate 0.88 times more return on investment than Applied Finance. However, State Street Premier is 1.14 times less risky than Applied Finance. It trades about 0.18 of its potential returns per unit of risk. Applied Finance Explorer is currently generating about 0.1 per unit of risk. If you would invest  13,486  in State Street Premier on September 13, 2024 and sell it today you would earn a total of  1,491  from holding State Street Premier or generate 11.06% return on investment over 90 days.

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

State Street Premier  vs.  Applied Finance Explorer

State Street Premier

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in State Street Premier are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, State Street may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Applied Finance Explorer

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Applied Finance Explorer are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Applied Finance may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with State Street and Applied Finance

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

The idea behind State Street Premier and Applied Finance Explorer 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.

Check out your portfolio center.

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.