Correlation Between Tencent Music and Pearson PLC

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

By analyzing existing cross correlation between Tencent Music Entertainment and Pearson PLC ADR, you can compare the effects of market volatilities on Tencent Music and Pearson PLC 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 Tencent Music with a short position of Pearson PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tencent Music and Pearson PLC.

Diversification Opportunities for Tencent Music and Pearson PLC

0.7

Correlation Coefficient

Tencent Music  Pearson PLC

Poor diversification

The 3 months correlation between Tencent and Pearson is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Tencent Music Entertainment and Pearson PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pearson PLC ADR and Tencent Music 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 Tencent Music Entertainment are associated (or correlated) with Pearson PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pearson PLC ADR has no effect on the direction of Tencent Music i.e., Tencent Music and Pearson PLC go up and down completely randomly.

Pair Corralation between Tencent Music and Pearson PLC

Considering the 90-day investment horizon Tencent Music Entertainment is expected to generate 2.48 times more return on investment than Pearson PLC. However, Tencent Music is 2.48 times more volatile than Pearson PLC ADR. It trades about 0.09 of its potential returns per unit of risk. Pearson PLC ADR is currently generating about -0.02 per unit of risk. If you would invest  1,175  in Tencent Music Entertainment on December 22, 2024 and sell it today you would earn a total of  225.00  from holding Tencent Music Entertainment or generate 19.15% return on investment over 90 days.

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

Tencent Music Entertainment  vs.  Pearson PLC ADR

Tencent Music Entert

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tencent Music Entertainment are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain primary indicators, Tencent Music exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pearson PLC ADR

Risk-Adjusted Performance

Insignificant

Over the last 90 days Pearson PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Pearson PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Tencent Music and Pearson PLC

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

The idea behind Tencent Music Entertainment and Pearson PLC ADR 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 Anywhere module to track or share privately all of your investments from the convenience of any device.