Correlation Between Unity Foods and MCB Bank

Can any of the company-specific risk be diversified away by investing in both Unity Foods and MCB Bank 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 Unity Foods and MCB Bank into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Unity Foods and MCB Bank, you can compare the effects of market volatilities on Unity Foods and MCB Bank 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 Unity Foods with a short position of MCB Bank. Check out your portfolio center. Please also check ongoing floating volatility patterns of Unity Foods and MCB Bank.

Diversification Opportunities for Unity Foods and MCB Bank

0.78

Correlation Coefficient

Unity Foods  MCB Bank

Poor diversification

The 3 months correlation between Unity and MCB is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Unity Foods and MCB Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MCB Bank and Unity Foods 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 Unity Foods are associated (or correlated) with MCB Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MCB Bank has no effect on the direction of Unity Foods i.e., Unity Foods and MCB Bank go up and down completely randomly.

Pair Corralation between Unity Foods and MCB Bank

Assuming the 90 days trading horizon Unity Foods is expected to under-perform the MCB Bank. But the stock apears to be less risky and, when comparing its historical volatility, Unity Foods is 1.2 times less risky than MCB Bank. The stock trades about -0.26 of its potential returns per unit of risk. The MCB Bank is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  27,405  in MCB Bank on October 9, 2024 and sell it today you would earn a total of  1,410  from holding MCB Bank or generate 5.15% return on investment over 90 days.

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

Unity Foods  vs.  MCB Bank

Unity Foods

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Unity Foods are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite quite weak forward indicators, Unity Foods disclosed solid returns over the last few months and may actually be approaching a breakup point.

MCB Bank

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MCB Bank are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, MCB Bank reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Unity Foods and MCB Bank

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

The idea behind Unity Foods and MCB Bank 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.