Correlation Between Danone SA and LOreal SA

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

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

Diversification Opportunities for Danone SA and LOreal SA

0.61

Correlation Coefficient

Danone SA  LOreal SA

Poor diversification

The 3 months correlation between Danone and LOreal is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Danone SA and LOreal SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LOreal SA and Danone SA 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 Danone SA are associated (or correlated) with LOreal SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LOreal SA has no effect on the direction of Danone SA i.e., Danone SA and LOreal SA go up and down completely randomly.

Pair Corralation between Danone SA and LOreal SA

Assuming the 90 days horizon Danone SA is expected to generate 3.48 times less return on investment than LOreal SA. But when comparing it to its historical volatility, Danone SA is 1.5 times less risky than LOreal SA. It trades about 0.02 of its potential returns per unit of risk. LOreal SA is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  31,831  in LOreal SA on February 3, 2024 and sell it today you would earn a total of  11,839  from holding LOreal SA or generate 37.19% return on investment over 90 days.

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

Danone SA  vs.  LOreal SA

Danone SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Danone SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Danone SA is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

LOreal SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, LOreal SA is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Danone SA and LOreal SA

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

The idea behind Danone SA and LOreal SA 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.