Correlation Between Extended Market and Wells Fargo

Can any of the company-specific risk be diversified away by investing in both Extended Market and Wells Fargo 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 Extended Market and Wells Fargo into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Extended Market Index and Wells Fargo Mon, you can compare the effects of market volatilities on Extended Market and Wells Fargo 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 Extended Market with a short position of Wells Fargo. Check out your portfolio center. Please also check ongoing floating volatility patterns of Extended Market and Wells Fargo.

Diversification Opportunities for Extended Market and Wells Fargo

0.89

Correlation Coefficient

Extended Market  Wells Fargo

Very poor diversification

The 3 months correlation between Extended and Wells is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and Wells Fargo Mon in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wells Fargo Mon and Extended Market 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 Extended Market Index are associated (or correlated) with Wells Fargo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wells Fargo Mon has no effect on the direction of Extended Market i.e., Extended Market and Wells Fargo go up and down completely randomly.

Pair Corralation between Extended Market and Wells Fargo

Assuming the 90 days horizon Extended Market is expected to generate 1.15 times less return on investment than Wells Fargo. In addition to that, Extended Market is 1.22 times more volatile than Wells Fargo Mon. It trades about 0.02 of its total potential returns per unit of risk. Wells Fargo Mon is currently generating about 0.02 per unit of volatility. If you would invest  1,930  in Wells Fargo Mon on September 20, 2024 and sell it today you would earn a total of  84.00  from holding Wells Fargo Mon or generate 4.35% return on investment over 90 days.

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

Extended Market Index  vs.  Wells Fargo Mon

Extended Market Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extended Market Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Extended Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Wells Fargo Mon

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wells Fargo Mon has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Wells Fargo is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Extended Market and Wells Fargo

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

The idea behind Extended Market Index and Wells Fargo Mon 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.