Correlation Between Square and PayPal Holdings

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

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

Diversification Opportunities for Square and PayPal Holdings

0.91

Correlation Coefficient

Square  PayPal Holdings

Almost no diversification

The 3 months correlation between Square and PayPal is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Square Inc and PayPal Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PayPal Holdings and Square 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 Square Inc are associated (or correlated) with PayPal Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PayPal Holdings has no effect on the direction of Square i.e., Square and PayPal Holdings go up and down completely randomly.

Pair Corralation between Square and PayPal Holdings

Assuming the 90 days horizon Square Inc is expected to generate 1.34 times more return on investment than PayPal Holdings. However, Square is 1.34 times more volatile than PayPal Holdings. It trades about 0.2 of its potential returns per unit of risk. PayPal Holdings is currently generating about 0.19 per unit of risk. If you would invest  5,901  in Square Inc on September 2, 2024 and sell it today you would earn a total of  2,416  from holding Square Inc or generate 40.94% return on investment over 90 days.

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

Square Inc  vs.  PayPal Holdings

Square Inc

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Square Inc are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Square reported solid returns over the last few months and may actually be approaching a breakup point.

PayPal Holdings

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in PayPal Holdings are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, PayPal Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Square and PayPal Holdings

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

The idea behind Square Inc and PayPal 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .