Correlation Between Waste Management and Prudential Financial

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

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

Diversification Opportunities for Waste Management and Prudential Financial

0.84

Correlation Coefficient

Waste Management  Prudential Financial

Very poor diversification

The 3 months correlation between Waste and Prudential is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Waste Management and Prudential Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Financial and Waste Management 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 Waste Management are associated (or correlated) with Prudential Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Financial has no effect on the direction of Waste Management i.e., Waste Management and Prudential Financial go up and down completely randomly.

Pair Corralation between Waste Management and Prudential Financial

Assuming the 90 days trading horizon Waste Management is expected to under-perform the Prudential Financial. But the stock apears to be less risky and, when comparing its historical volatility, Waste Management is 1.07 times less risky than Prudential Financial. The stock trades about -0.42 of its potential returns per unit of risk. The Prudential Financial is currently generating about -0.32 of returns per unit of risk over similar time horizon. If you would invest  38,490  in Prudential Financial on October 8, 2024 and sell it today you would lose (1,971) from holding Prudential Financial or give up 5.12% of portfolio value over 90 days.

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

Waste Management  vs.  Prudential Financial

Waste Management

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Waste Management are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Waste Management may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Prudential Financial

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Waste Management and Prudential Financial

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

The idea behind Waste Management and Prudential Financial 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.