Correlation Between Westwood Largecap and Westwood Alternative

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

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

Diversification Opportunities for Westwood Largecap and Westwood Alternative

-0.32

Correlation Coefficient

Westwood Largecap  Westwood Alternative

Very good diversification

The 3 months correlation between Westwood and Westwood is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Westwood Largecap Value and Westwood Alternative Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westwood Alternative and Westwood Largecap 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 Westwood Largecap Value are associated (or correlated) with Westwood Alternative. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westwood Alternative has no effect on the direction of Westwood Largecap i.e., Westwood Largecap and Westwood Alternative go up and down completely randomly.

Pair Corralation between Westwood Largecap and Westwood Alternative

Assuming the 90 days horizon Westwood Largecap Value is expected to under-perform the Westwood Alternative. In addition to that, Westwood Largecap is 8.1 times more volatile than Westwood Alternative Income. It trades about -0.01 of its total potential returns per unit of risk. Westwood Alternative Income is currently generating about 0.38 per unit of volatility. If you would invest  966.00  in Westwood Alternative Income on December 30, 2024 and sell it today you would earn a total of  10.00  from holding Westwood Alternative Income or generate 1.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	46.77%
Values	Daily Returns

Westwood Largecap Value  vs.  Westwood Alternative Income

Westwood Largecap Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days Westwood Largecap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Westwood Largecap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Westwood Alternative

Risk-Adjusted Performance

Strong

Over the last 90 days Westwood Alternative Income has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Westwood Alternative is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Westwood Largecap and Westwood Alternative

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

The idea behind Westwood Largecap Value and Westwood Alternative Income 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.