Correlation Between Tree Island and Transition Metals

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

Diversification Opportunities for Tree Island and Transition Metals

-0.56

Correlation Coefficient

Tree Island  Transition Metals

Excellent diversification

The 3 months correlation between Tree and Transition is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Tree Island Steel and Transition Metals Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transition Metals Corp 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 Transition Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transition Metals Corp has no effect on the direction of Tree Island i.e., Tree Island and Transition Metals go up and down completely randomly.

Pair Corralation between Tree Island and Transition Metals

Assuming the 90 days trading horizon Tree Island is expected to generate 4.07 times less return on investment than Transition Metals. But when comparing it to its historical volatility, Tree Island Steel is 3.14 times less risky than Transition Metals. It trades about 0.08 of its potential returns per unit of risk. Transition Metals Corp is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  5.00  in Transition Metals Corp on October 12, 2024 and sell it today you would earn a total of  0.50  from holding Transition Metals Corp or generate 10.0% return on investment over 90 days.

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

Tree Island Steel  vs.  Transition Metals Corp

Tree Island Steel

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Tree Island Steel are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating essential indicators, Tree Island may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Transition Metals Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Transition Metals Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Transition Metals is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Tree Island and Transition Metals

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

The idea behind Tree Island Steel and Transition Metals Corp 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.