Correlation Between Tree Island and NextSource Materials

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

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

Diversification Opportunities for Tree Island and NextSource Materials

-0.75

Correlation Coefficient

Tree Island  NextSource Materials

Pay attention - limited upside

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

Pair Corralation between Tree Island and NextSource Materials

Assuming the 90 days trading horizon Tree Island Steel is expected to generate 0.45 times more return on investment than NextSource Materials. However, Tree Island Steel is 2.2 times less risky than NextSource Materials. It trades about 0.02 of its potential returns per unit of risk. NextSource Materials is currently generating about -0.05 per unit of risk. If you would invest  288.00  in Tree Island Steel on September 13, 2024 and sell it today you would earn a total of  12.00  from holding Tree Island Steel or generate 4.17% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	99.6%
Values	Daily Returns

Tree Island Steel  vs.  NextSource Materials

Tree Island Steel

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tree Island Steel are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating essential indicators, Tree Island displayed solid returns over the last few months and may actually be approaching a breakup point.

NextSource Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NextSource Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Tree Island and NextSource Materials

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

The idea behind Tree Island Steel and NextSource Materials 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.