Correlation Between AB Volvo and Prevas AB

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

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

Diversification Opportunities for AB Volvo and Prevas AB

-0.35

Correlation Coefficient

AB Volvo  Prevas AB

Very good diversification

The 3 months correlation between VOLV-A and Prevas is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding AB Volvo and Prevas AB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prevas AB and AB Volvo 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 AB Volvo are associated (or correlated) with Prevas AB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prevas AB has no effect on the direction of AB Volvo i.e., AB Volvo and Prevas AB go up and down completely randomly.

Pair Corralation between AB Volvo and Prevas AB

Assuming the 90 days trading horizon AB Volvo is expected to generate 1.15 times more return on investment than Prevas AB. However, AB Volvo is 1.15 times more volatile than Prevas AB. It trades about 0.24 of its potential returns per unit of risk. Prevas AB is currently generating about -0.05 per unit of risk. If you would invest  27,300  in AB Volvo on November 29, 2024 and sell it today you would earn a total of  7,000  from holding AB Volvo or generate 25.64% return on investment over 90 days.

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

AB Volvo  vs.  Prevas AB

AB Volvo

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in AB Volvo are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak essential indicators, AB Volvo sustained solid returns over the last few months and may actually be approaching a breakup point.

Prevas AB

Risk-Adjusted Performance

Very Weak

Over the last 90 days Prevas AB has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Prevas AB is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with AB Volvo and Prevas AB

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

The idea behind AB Volvo and Prevas AB 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.