Correlation Between United Utilities and Insteel Industries

Can any of the company-specific risk be diversified away by investing in both United Utilities and Insteel Industries 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 United Utilities and Insteel Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between United Utilities Group and Insteel Industries, you can compare the effects of market volatilities on United Utilities and Insteel Industries 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 United Utilities with a short position of Insteel Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of United Utilities and Insteel Industries.

Diversification Opportunities for United Utilities and Insteel Industries

0.8

Correlation Coefficient

United Utilities  Insteel Industries

Very poor diversification

The 3 months correlation between United and Insteel is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding United Utilities Group and Insteel Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Insteel Industries and United Utilities 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 United Utilities Group are associated (or correlated) with Insteel Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Insteel Industries has no effect on the direction of United Utilities i.e., United Utilities and Insteel Industries go up and down completely randomly.

Pair Corralation between United Utilities and Insteel Industries

Assuming the 90 days trading horizon United Utilities is expected to generate 1.25 times less return on investment than Insteel Industries. But when comparing it to its historical volatility, United Utilities Group is 1.3 times less risky than Insteel Industries. It trades about 0.01 of its potential returns per unit of risk. Insteel Industries is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,596  in Insteel Industries on October 25, 2024 and sell it today you would earn a total of  44.00  from holding Insteel Industries or generate 1.69% return on investment over 90 days.

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

United Utilities Group  vs.  Insteel Industries

United Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days United Utilities Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, United Utilities is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Insteel Industries

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Insteel Industries are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Insteel Industries is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with United Utilities and Insteel Industries

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

The idea behind United Utilities Group and Insteel Industries 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.