Correlation Between Sterling Construction and Automatic Data

Can any of the company-specific risk be diversified away by investing in both Sterling Construction and Automatic Data 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 Sterling Construction and Automatic Data into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Sterling Construction and Automatic Data Processing, you can compare the effects of market volatilities on Sterling Construction and Automatic Data 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 Sterling Construction with a short position of Automatic Data. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sterling Construction and Automatic Data.

Diversification Opportunities for Sterling Construction and Automatic Data

0.94

Correlation Coefficient

Sterling Construction  Automatic Data

Almost no diversification

The 3 months correlation between Sterling and Automatic is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Sterling Construction and Automatic Data Processing in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Automatic Data Processing and Sterling Construction 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 Sterling Construction are associated (or correlated) with Automatic Data. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Automatic Data Processing has no effect on the direction of Sterling Construction i.e., Sterling Construction and Automatic Data go up and down completely randomly.

Pair Corralation between Sterling Construction and Automatic Data

Assuming the 90 days horizon Sterling Construction is expected to generate 3.57 times more return on investment than Automatic Data. However, Sterling Construction is 3.57 times more volatile than Automatic Data Processing. It trades about 0.08 of its potential returns per unit of risk. Automatic Data Processing is currently generating about 0.13 per unit of risk. If you would invest  14,070  in Sterling Construction on October 10, 2024 and sell it today you would earn a total of  2,095  from holding Sterling Construction or generate 14.89% return on investment over 90 days.

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

Sterling Construction  vs.  Automatic Data Processing

Sterling Construction

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sterling Construction are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sterling Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Automatic Data Processing

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Automatic Data Processing are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Automatic Data may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Sterling Construction and Automatic Data

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

The idea behind Sterling Construction and Automatic Data Processing 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.