Correlation Between Red Light and BC Craft

Can any of the company-specific risk be diversified away by investing in both Red Light and BC Craft 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 BC Craft 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 BC Craft Supply, you can compare the effects of market volatilities on Red Light and BC Craft 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 BC Craft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Red Light and BC Craft.

Diversification Opportunities for Red Light and BC Craft

0.05

Correlation Coefficient

Red Light  BC Craft

Significant diversification

The 3 months correlation between Red and CRFTF is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Red Light Holland and BC Craft Supply in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BC Craft Supply 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 BC Craft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BC Craft Supply has no effect on the direction of Red Light i.e., Red Light and BC Craft go up and down completely randomly.

Pair Corralation between Red Light and BC Craft

Assuming the 90 days horizon Red Light Holland is expected to generate 0.41 times more return on investment than BC Craft. However, Red Light Holland is 2.46 times less risky than BC Craft. It trades about -0.03 of its potential returns per unit of risk. BC Craft Supply is currently generating about -0.13 per unit of risk. If you would invest  3.40  in Red Light Holland on December 1, 2024 and sell it today you would lose (0.50) from holding Red Light Holland or give up 14.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	93.75%
Values	Daily Returns

Red Light Holland  vs.  BC Craft Supply

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 latest unfluctuating performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

BC Craft Supply

Risk-Adjusted Performance

Very Weak

Over the last 90 days BC Craft Supply 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 Red Light and BC Craft

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

The idea behind Red Light Holland and BC Craft Supply 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.