Correlation Between Tree House and Energy Development

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

By analyzing existing cross correlation between Tree House Education and Energy Development, you can compare the effects of market volatilities on Tree House and Energy Development 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 Tree House with a short position of Energy Development. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tree House and Energy Development.

Diversification Opportunities for Tree House and Energy Development

0.75

Correlation Coefficient

Tree House  Energy Development

Poor diversification

The 3 months correlation between Tree and Energy is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Tree House Education and Energy Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Development and Tree House 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 Tree House Education are associated (or correlated) with Energy Development. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Development has no effect on the direction of Tree House i.e., Tree House and Energy Development go up and down completely randomly.

Pair Corralation between Tree House and Energy Development

Assuming the 90 days trading horizon Tree House Education is expected to under-perform the Energy Development. In addition to that, Tree House is 1.02 times more volatile than Energy Development. It trades about -0.29 of its total potential returns per unit of risk. Energy Development is currently generating about -0.19 per unit of volatility. If you would invest  2,767  in Energy Development on December 26, 2024 and sell it today you would lose (887.00) from holding Energy Development or give up 32.06% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.39%
Values	Daily Returns

Tree House Education  vs.  Energy Development

Tree House Education

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tree House Education has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic 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.

Energy Development

Risk-Adjusted Performance

Very Weak

Over the last 90 days Energy Development has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Tree House and Energy Development

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

The idea behind Tree House Education and Energy Development 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.

Check out your portfolio center.

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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..