Correlation Between Verizon Communications and Telefonica

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

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

Diversification Opportunities for Verizon Communications and Telefonica

0.83

Correlation Coefficient

Verizon Communications  Telefonica

Very poor diversification

The 3 months correlation between Verizon and Telefonica is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and Telefonica SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telefonica SA ADR and Verizon Communications 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 Verizon Communications are associated (or correlated) with Telefonica. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telefonica SA ADR has no effect on the direction of Verizon Communications i.e., Verizon Communications and Telefonica go up and down completely randomly.

Pair Corralation between Verizon Communications and Telefonica

Allowing for the 90-day total investment horizon Verizon Communications is expected to generate 2.03 times less return on investment than Telefonica. But when comparing it to its historical volatility, Verizon Communications is 1.0 times less risky than Telefonica. It trades about 0.25 of its potential returns per unit of risk. Telefonica SA ADR is currently generating about 0.51 of returns per unit of risk over similar time horizon. If you would invest  399.00  in Telefonica SA ADR on November 28, 2024 and sell it today you would earn a total of  47.50  from holding Telefonica SA ADR or generate 11.9% return on investment over 90 days.

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

Verizon Communications  vs.  Telefonica SA ADR

Verizon Communications

Risk-Adjusted Performance

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Verizon Communications is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Telefonica SA ADR

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Telefonica SA ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Telefonica is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Verizon Communications and Telefonica

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

The idea behind Verizon Communications and Telefonica SA ADR 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.