Correlation Between Woolworths and Challenger

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

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

Diversification Opportunities for Woolworths and Challenger

0.6

Correlation Coefficient

Woolworths  Challenger

Poor diversification

The 3 months correlation between Woolworths and Challenger is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Woolworths and Challenger in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Challenger and Woolworths 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 Woolworths are associated (or correlated) with Challenger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Challenger has no effect on the direction of Woolworths i.e., Woolworths and Challenger go up and down completely randomly.

Pair Corralation between Woolworths and Challenger

Assuming the 90 days trading horizon Woolworths is expected to generate 0.76 times more return on investment than Challenger. However, Woolworths is 1.32 times less risky than Challenger. It trades about -0.1 of its potential returns per unit of risk. Challenger is currently generating about -0.12 per unit of risk. If you would invest  3,299  in Woolworths on October 6, 2024 and sell it today you would lose (229.00) from holding Woolworths or give up 6.94% of portfolio value over 90 days.

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

Woolworths  vs.  Challenger

Woolworths

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Woolworths has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Challenger

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Challenger has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Woolworths and Challenger

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

The idea behind Woolworths and Challenger 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.