Correlation Between Telefonica and Verizon Communications

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

By analyzing existing cross correlation between Telefonica SA ADR and Verizon Communications, you can compare the effects of market volatilities on Telefonica and Verizon Communications 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 Telefonica with a short position of Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Telefonica and Verizon Communications.

Diversification Opportunities for Telefonica and Verizon Communications

0.72

Correlation Coefficient

Telefonica  Verizon Communications

Poor diversification

The 3 months correlation between Telefonica and Verizon is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Telefonica SA ADR and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and Telefonica 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 Telefonica SA ADR are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Telefonica i.e., Telefonica and Verizon Communications go up and down completely randomly.

Pair Corralation between Telefonica and Verizon Communications

Considering the 90-day investment horizon Telefonica SA ADR is expected to generate 0.96 times more return on investment than Verizon Communications. However, Telefonica SA ADR is 1.04 times less risky than Verizon Communications. It trades about -0.41 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.54 per unit of risk. If you would invest  436.00  in Telefonica SA ADR on September 28, 2024 and sell it today you would lose (33.00) from holding Telefonica SA ADR or give up 7.57% of portfolio value over 90 days.

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

Telefonica SA ADR  vs.  Verizon Communications

Telefonica SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Telefonica SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unfluctuating performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Telefonica and Verizon Communications

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

The idea behind Telefonica SA ADR and Verizon Communications 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.