Correlation Between Wesfarmers and Retail Estates

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

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

Diversification Opportunities for Wesfarmers and Retail Estates

-0.3

Correlation Coefficient

Wesfarmers  Retail Estates

Very good diversification

The 3 months correlation between Wesfarmers and Retail is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Wesfarmers Limited and Retail Estates NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Retail Estates NV and Wesfarmers 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 Wesfarmers Limited are associated (or correlated) with Retail Estates. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Retail Estates NV has no effect on the direction of Wesfarmers i.e., Wesfarmers and Retail Estates go up and down completely randomly.

Pair Corralation between Wesfarmers and Retail Estates

Assuming the 90 days horizon Wesfarmers Limited is expected to under-perform the Retail Estates. In addition to that, Wesfarmers is 1.17 times more volatile than Retail Estates NV. It trades about -0.04 of its total potential returns per unit of risk. Retail Estates NV is currently generating about 0.05 per unit of volatility. If you would invest  5,780  in Retail Estates NV on December 22, 2024 and sell it today you would earn a total of  160.00  from holding Retail Estates NV or generate 2.77% return on investment over 90 days.

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

Wesfarmers Limited  vs.  Retail Estates NV

Wesfarmers Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days Wesfarmers Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Wesfarmers is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Retail Estates NV

Risk-Adjusted Performance

Insignificant

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

Pair Trading with Wesfarmers and Retail Estates

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

The idea behind Wesfarmers Limited and Retail Estates NV 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.