Correlation Between Volvo AB and Austin Engineering

Can any of the company-specific risk be diversified away by investing in both Volvo AB and Austin Engineering 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 Volvo AB and Austin Engineering into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Volvo AB ADR and Austin Engineering Limited, you can compare the effects of market volatilities on Volvo AB and Austin Engineering 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 Volvo AB with a short position of Austin Engineering. Check out your portfolio center. Please also check ongoing floating volatility patterns of Volvo AB and Austin Engineering.

Diversification Opportunities for Volvo AB and Austin Engineering

-0.46

Correlation Coefficient

Volvo AB  Austin Engineering

Very good diversification

The 3 months correlation between Volvo and Austin is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding Volvo AB ADR and Austin Engineering Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Austin Engineering and Volvo AB 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 Volvo AB ADR are associated (or correlated) with Austin Engineering. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Austin Engineering has no effect on the direction of Volvo AB i.e., Volvo AB and Austin Engineering go up and down completely randomly.

Pair Corralation between Volvo AB and Austin Engineering

Assuming the 90 days horizon Volvo AB ADR is expected to generate 0.25 times more return on investment than Austin Engineering. However, Volvo AB ADR is 3.96 times less risky than Austin Engineering. It trades about 0.2 of its potential returns per unit of risk. Austin Engineering Limited is currently generating about -0.01 per unit of risk. If you would invest  2,512  in Volvo AB ADR on December 2, 2024 and sell it today you would earn a total of  576.00  from holding Volvo AB ADR or generate 22.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	93.85%
Values	Daily Returns

Volvo AB ADR  vs.  Austin Engineering Limited

Volvo AB ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Volvo AB ADR are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile essential indicators, Volvo AB showed solid returns over the last few months and may actually be approaching a breakup point.

Austin Engineering

Risk-Adjusted Performance

Very Weak

Over the last 90 days Austin Engineering Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Austin Engineering is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Volvo AB and Austin Engineering

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

The idea behind Volvo AB ADR and Austin Engineering Limited 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.