Correlation Between Tree House and Wonder Electricals

Can any of the company-specific risk be diversified away by investing in both Tree House and Wonder Electricals 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 Wonder Electricals 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 Wonder Electricals Limited, you can compare the effects of market volatilities on Tree House and Wonder Electricals 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 Wonder Electricals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tree House and Wonder Electricals.

Diversification Opportunities for Tree House and Wonder Electricals

0.35

Correlation Coefficient

Tree House  Wonder Electricals

Weak diversification

The 3 months correlation between Tree and Wonder is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Tree House Education and Wonder Electricals Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wonder Electricals 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 Wonder Electricals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wonder Electricals has no effect on the direction of Tree House i.e., Tree House and Wonder Electricals go up and down completely randomly.

Pair Corralation between Tree House and Wonder Electricals

Assuming the 90 days trading horizon Tree House is expected to generate 8.21 times less return on investment than Wonder Electricals. But when comparing it to its historical volatility, Tree House Education is 1.71 times less risky than Wonder Electricals. It trades about 0.02 of its potential returns per unit of risk. Wonder Electricals Limited is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  14,773  in Wonder Electricals Limited on October 25, 2024 and sell it today you would earn a total of  3,484  from holding Wonder Electricals Limited or generate 23.58% return on investment over 90 days.

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

Tree House Education  vs.  Wonder Electricals Limited

Tree House Education

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Tree House Education are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Tree House is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Wonder Electricals

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Wonder Electricals Limited are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Wonder Electricals exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tree House and Wonder Electricals

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

The idea behind Tree House Education and Wonder Electricals Limited 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.