Correlation Between Sound Shore and Madison Investors

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

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

Diversification Opportunities for Sound Shore and Madison Investors

0.64

Correlation Coefficient

Sound Shore  Madison Investors

Poor diversification

The 3 months correlation between Sound and Madison is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Sound Shore Fund and Madison Investors Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison Investors and Sound Shore 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 Sound Shore Fund are associated (or correlated) with Madison Investors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison Investors has no effect on the direction of Sound Shore i.e., Sound Shore and Madison Investors go up and down completely randomly.

Pair Corralation between Sound Shore and Madison Investors

Assuming the 90 days horizon Sound Shore Fund is expected to under-perform the Madison Investors. But the mutual fund apears to be less risky and, when comparing its historical volatility, Sound Shore Fund is 1.05 times less risky than Madison Investors. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Madison Investors Fund is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,911  in Madison Investors Fund on December 28, 2024 and sell it today you would earn a total of  8.00  from holding Madison Investors Fund or generate 0.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

Sound Shore Fund  vs.  Madison Investors Fund

Sound Shore Fund

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sound Shore Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Sound Shore is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Madison Investors

Risk-Adjusted Performance

Very Weak

Over the last 90 days Madison Investors Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Madison Investors is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Sound Shore and Madison Investors

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

The idea behind Sound Shore Fund and Madison Investors Fund 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.