Correlation Between Wesfarmers and X-FAB Silicon

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

By analyzing existing cross correlation between Wesfarmers Limited and X FAB Silicon Foundries, you can compare the effects of market volatilities on Wesfarmers and X-FAB Silicon 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 X-FAB Silicon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wesfarmers and X-FAB Silicon.

Diversification Opportunities for Wesfarmers and X-FAB Silicon

0.2

Correlation Coefficient

Wesfarmers  X-FAB Silicon

Modest diversification

The 3 months correlation between Wesfarmers and X-FAB is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Wesfarmers Limited and X FAB Silicon Foundries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on X FAB Silicon 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 X-FAB Silicon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of X FAB Silicon has no effect on the direction of Wesfarmers i.e., Wesfarmers and X-FAB Silicon go up and down completely randomly.

Pair Corralation between Wesfarmers and X-FAB Silicon

Assuming the 90 days horizon Wesfarmers Limited is expected to generate 0.53 times more return on investment than X-FAB Silicon. However, Wesfarmers Limited is 1.88 times less risky than X-FAB Silicon. It trades about 0.07 of its potential returns per unit of risk. X FAB Silicon Foundries is currently generating about -0.02 per unit of risk. If you would invest  2,775  in Wesfarmers Limited on October 4, 2024 and sell it today you would earn a total of  1,547  from holding Wesfarmers Limited or generate 55.75% return on investment over 90 days.

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

Wesfarmers Limited  vs.  X FAB Silicon Foundries

Wesfarmers Limited

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Wesfarmers Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

X FAB Silicon

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days X FAB Silicon Foundries has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, X-FAB Silicon is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Wesfarmers and X-FAB Silicon

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

The idea behind Wesfarmers Limited and X FAB Silicon Foundries 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.