Correlation Between Wilshire Real and Lincoln Electric

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

By analyzing existing cross correlation between Wilshire Real Estate and Lincoln Electric Holdings, you can compare the effects of market volatilities on Wilshire Real and Lincoln Electric 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 Wilshire Real with a short position of Lincoln Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wilshire Real and Lincoln Electric.

Diversification Opportunities for Wilshire Real and Lincoln Electric

0.7

Correlation Coefficient

Wilshire Real  Lincoln Electric

Poor diversification

The 3 months correlation between Wilshire and Lincoln is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Wilshire Real Estate and Lincoln Electric Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lincoln Electric Holdings and Wilshire Real 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 Wilshire Real Estate are associated (or correlated) with Lincoln Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lincoln Electric Holdings has no effect on the direction of Wilshire Real i.e., Wilshire Real and Lincoln Electric go up and down completely randomly.

Pair Corralation between Wilshire Real and Lincoln Electric

Assuming the 90 days trading horizon Wilshire Real Estate is expected to generate 1.25 times more return on investment than Lincoln Electric. However, Wilshire Real is 1.25 times more volatile than Lincoln Electric Holdings. It trades about -0.17 of its potential returns per unit of risk. Lincoln Electric Holdings is currently generating about -0.55 per unit of risk. If you would invest  29,377  in Wilshire Real Estate on October 9, 2024 and sell it today you would lose (1,285) from holding Wilshire Real Estate or give up 4.37% of portfolio value over 90 days.

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

Wilshire Real Estate  vs.  Lincoln Electric Holdings

Pair Trading with Wilshire Real and Lincoln Electric

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

The idea behind Wilshire Real Estate and Lincoln Electric Holdings 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.