Correlation Between Target and BM European

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

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

Diversification Opportunities for Target and BM European

0.71

Correlation Coefficient

Target  BM European

Poor diversification

The 3 months correlation between Target and BMRPF is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Target and BM European Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BM European Value and Target 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 Target are associated (or correlated) with BM European. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BM European Value has no effect on the direction of Target i.e., Target and BM European go up and down completely randomly.

Pair Corralation between Target and BM European

Considering the 90-day investment horizon Target is expected to under-perform the BM European. But the stock apears to be less risky and, when comparing its historical volatility, Target is 2.24 times less risky than BM European. The stock trades about -0.23 of its potential returns per unit of risk. The BM European Value is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  443.00  in BM European Value on December 28, 2024 and sell it today you would lose (103.00) from holding BM European Value or give up 23.25% of portfolio value over 90 days.

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

Target  vs.  BM European Value

Target

Risk-Adjusted Performance

Very Weak

Over the last 90 days Target has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

BM European Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days BM European Value has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Target and BM European

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

The idea behind Target and BM European Value 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.