Correlation Between Western Sierra and BBB Foods

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

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

Diversification Opportunities for Western Sierra and BBB Foods

0.63

Correlation Coefficient

Western Sierra  BBB Foods

Poor diversification

The 3 months correlation between Western and BBB is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Western Sierra Mining and BBB Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BBB Foods and Western Sierra 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 Western Sierra Mining are associated (or correlated) with BBB Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BBB Foods has no effect on the direction of Western Sierra i.e., Western Sierra and BBB Foods go up and down completely randomly.

Pair Corralation between Western Sierra and BBB Foods

Given the investment horizon of 90 days Western Sierra Mining is expected to generate 37.37 times more return on investment than BBB Foods. However, Western Sierra is 37.37 times more volatile than BBB Foods. It trades about 0.11 of its potential returns per unit of risk. BBB Foods is currently generating about 0.08 per unit of risk. If you would invest  8.66  in Western Sierra Mining on November 20, 2024 and sell it today you would lose (8.36) from holding Western Sierra Mining or give up 96.54% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	51.61%
Values	Daily Returns

Western Sierra Mining  vs.  BBB Foods

Western Sierra Mining

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Sierra Mining are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Western Sierra exhibited solid returns over the last few months and may actually be approaching a breakup point.

BBB Foods

Risk-Adjusted Performance

Very Weak

Over the last 90 days BBB Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental drivers remain somewhat strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Western Sierra and BBB Foods

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

The idea behind Western Sierra Mining and BBB Foods 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 Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.