Correlation Between Warner Music and Electronic Arts

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Can any of the company-specific risk be diversified away by investing in both Warner Music and Electronic Arts 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 Warner Music and Electronic Arts into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Warner Music Group and Electronic Arts, you can compare the effects of market volatilities on Warner Music and Electronic Arts 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 Warner Music with a short position of Electronic Arts. Check out your portfolio center. Please also check ongoing floating volatility patterns of Warner Music and Electronic Arts.

Diversification Opportunities for Warner Music and Electronic Arts

0.76
  Correlation Coefficient

Poor diversification

The 3 months correlation between Warner and Electronic is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Warner Music Group and Electronic Arts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electronic Arts and Warner Music 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 Warner Music Group are associated (or correlated) with Electronic Arts. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electronic Arts has no effect on the direction of Warner Music i.e., Warner Music and Electronic Arts go up and down completely randomly.

Pair Corralation between Warner Music and Electronic Arts

Assuming the 90 days trading horizon Warner Music is expected to generate 2.99 times less return on investment than Electronic Arts. In addition to that, Warner Music is 1.61 times more volatile than Electronic Arts. It trades about 0.14 of its total potential returns per unit of risk. Electronic Arts is currently generating about 0.69 per unit of volatility. If you would invest  44,143  in Electronic Arts on September 5, 2024 and sell it today you would earn a total of  6,449  from holding Electronic Arts or generate 14.61% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Warner Music Group  vs.  Electronic Arts

 Performance 
       Timeline  
Warner Music Group 

Risk-Adjusted Performance

17 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Warner Music Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Warner Music sustained solid returns over the last few months and may actually be approaching a breakup point.
Electronic Arts 

Risk-Adjusted Performance

23 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Electronic Arts are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak forward indicators, Electronic Arts sustained solid returns over the last few months and may actually be approaching a breakup point.

Warner Music and Electronic Arts Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Warner Music and Electronic Arts

The main advantage of trading using opposite Warner Music and Electronic Arts positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Warner Music position performs unexpectedly, Electronic Arts 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 Electronic Arts will offset losses from the drop in Electronic Arts' long position.
The idea behind Warner Music Group and Electronic Arts 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.
Check out your portfolio center.
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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.

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