Correlation Between Western Digital and Eurotech SpA

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

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

Diversification Opportunities for Western Digital and Eurotech SpA

-0.65

Correlation Coefficient

Western Digital  Eurotech SpA

Excellent diversification

The 3 months correlation between Western and Eurotech is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Western Digital and Eurotech SpA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eurotech SpA and Western Digital 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 Western Digital are associated (or correlated) with Eurotech SpA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eurotech SpA has no effect on the direction of Western Digital i.e., Western Digital and Eurotech SpA go up and down completely randomly.

Pair Corralation between Western Digital and Eurotech SpA

Assuming the 90 days horizon Western Digital is expected to generate 0.7 times more return on investment than Eurotech SpA. However, Western Digital is 1.42 times less risky than Eurotech SpA. It trades about 0.1 of its potential returns per unit of risk. Eurotech SpA is currently generating about -0.19 per unit of risk. If you would invest  5,962  in Western Digital on September 3, 2024 and sell it today you would earn a total of  963.00  from holding Western Digital or generate 16.15% return on investment over 90 days.

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

Western Digital  vs.  Eurotech SpA

Western Digital

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Digital are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Western Digital reported solid returns over the last few months and may actually be approaching a breakup point.

Eurotech SpA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eurotech SpA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Western Digital and Eurotech SpA

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

The idea behind Western Digital and Eurotech SpA 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.