Correlation Between Stock Exchange and Eastern Water

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

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

Diversification Opportunities for Stock Exchange and Eastern Water

0.26

Correlation Coefficient

Stock Exchange  Eastern Water

Modest diversification

The 3 months correlation between Stock and Eastern is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Stock Exchange Of and Eastern Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastern Water Resources and Stock Exchange 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 Stock Exchange Of are associated (or correlated) with Eastern Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastern Water Resources has no effect on the direction of Stock Exchange i.e., Stock Exchange and Eastern Water go up and down completely randomly.

Pair Corralation between Stock Exchange and Eastern Water

Assuming the 90 days trading horizon Stock Exchange Of is expected to generate 0.67 times more return on investment than Eastern Water. However, Stock Exchange Of is 1.49 times less risky than Eastern Water. It trades about -0.04 of its potential returns per unit of risk. Eastern Water Resources is currently generating about -0.16 per unit of risk. If you would invest  141,721  in Stock Exchange Of on February 2, 2024 and sell it today you would lose (4,926) from holding Stock Exchange Of or give up 3.48% of portfolio value over 90 days.

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

Stock Exchange Of  vs.  Eastern Water Resources

Pair Trading with Stock Exchange and Eastern Water

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

The idea behind Stock Exchange Of and Eastern Water Resources 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 Global Correlations module to find global opportunities by holding instruments from different markets.