Correlation Between WPP PLC and Encore Capital

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

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

Diversification Opportunities for WPP PLC and Encore Capital

0.7

Correlation Coefficient

WPP PLC  Encore Capital

Poor diversification

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

Pair Corralation between WPP PLC and Encore Capital

Considering the 90-day investment horizon WPP PLC ADR is expected to generate 0.91 times more return on investment than Encore Capital. However, WPP PLC ADR is 1.1 times less risky than Encore Capital. It trades about -0.08 of its potential returns per unit of risk. Encore Capital Group is currently generating about -0.1 per unit of risk. If you would invest  5,320  in WPP PLC ADR on September 26, 2024 and sell it today you would lose (113.00) from holding WPP PLC ADR or give up 2.12% of portfolio value over 90 days.

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

WPP PLC ADR  vs.  Encore Capital Group

WPP PLC ADR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in WPP PLC ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, WPP PLC is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Encore Capital Group

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Capital Group are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Encore Capital is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with WPP PLC and Encore Capital

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

The idea behind WPP PLC ADR and Encore Capital Group 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.