Correlation Between Red Light and Benchmark Botanics

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

By analyzing existing cross correlation between Red Light Holland and Benchmark Botanics, you can compare the effects of market volatilities on Red Light and Benchmark Botanics 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 Red Light with a short position of Benchmark Botanics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Red Light and Benchmark Botanics.

Diversification Opportunities for Red Light and Benchmark Botanics

0.85

Correlation Coefficient

Red Light  Benchmark Botanics

Very poor diversification

The 3 months correlation between Red and Benchmark is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Red Light Holland and Benchmark Botanics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Benchmark Botanics and Red Light 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 Red Light Holland are associated (or correlated) with Benchmark Botanics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Benchmark Botanics has no effect on the direction of Red Light i.e., Red Light and Benchmark Botanics go up and down completely randomly.

Pair Corralation between Red Light and Benchmark Botanics

Assuming the 90 days horizon Red Light Holland is expected to generate 0.52 times more return on investment than Benchmark Botanics. However, Red Light Holland is 1.92 times less risky than Benchmark Botanics. It trades about -0.05 of its potential returns per unit of risk. Benchmark Botanics is currently generating about -0.13 per unit of risk. If you would invest  3.00  in Red Light Holland on December 29, 2024 and sell it today you would lose (0.90) from holding Red Light Holland or give up 30.0% of portfolio value over 90 days.

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

Red Light Holland  vs.  Benchmark Botanics

Red Light Holland

Risk-Adjusted Performance

Very Weak

Over the last 90 days Red Light Holland 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 April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Benchmark Botanics

Risk-Adjusted Performance

Very Weak

Over the last 90 days Benchmark Botanics has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's forward-looking signals 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 Red Light and Benchmark Botanics

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

The idea behind Red Light Holland and Benchmark Botanics 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.