Correlation Between Spirent Communications and European Metals

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

By analyzing existing cross correlation between Spirent Communications plc and European Metals Holdings, you can compare the effects of market volatilities on Spirent Communications and European Metals 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 Spirent Communications with a short position of European Metals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Spirent Communications and European Metals.

Diversification Opportunities for Spirent Communications and European Metals

-0.41

Correlation Coefficient

Spirent Communications  European Metals

Very good diversification

The 3 months correlation between Spirent and European is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Spirent Communications plc and European Metals Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on European Metals Holdings and Spirent Communications 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 Spirent Communications plc are associated (or correlated) with European Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of European Metals Holdings has no effect on the direction of Spirent Communications i.e., Spirent Communications and European Metals go up and down completely randomly.

Pair Corralation between Spirent Communications and European Metals

Assuming the 90 days trading horizon Spirent Communications plc is expected to generate 0.95 times more return on investment than European Metals. However, Spirent Communications plc is 1.05 times less risky than European Metals. It trades about 0.06 of its potential returns per unit of risk. European Metals Holdings is currently generating about -0.1 per unit of risk. If you would invest  9,565  in Spirent Communications plc on October 5, 2024 and sell it today you would earn a total of  8,055  from holding Spirent Communications plc or generate 84.21% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.68%
Values	Daily Returns

Spirent Communications plc  vs.  European Metals Holdings

Spirent Communications

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Spirent Communications plc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Spirent Communications is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

European Metals Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days European Metals Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Spirent Communications and European Metals

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

The idea behind Spirent Communications plc and European Metals Holdings 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.