Correlation Between Digital Power and Korea Electric

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

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

Diversification Opportunities for Digital Power and Korea Electric

-0.21

Correlation Coefficient

Digital Power  Korea Electric

Very good diversification

The 3 months correlation between Digital and Korea is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding Digital Power Communications and Korea Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Korea Electric Power and Digital Power 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 Digital Power Communications are associated (or correlated) with Korea Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Korea Electric Power has no effect on the direction of Digital Power i.e., Digital Power and Korea Electric go up and down completely randomly.

Pair Corralation between Digital Power and Korea Electric

Assuming the 90 days trading horizon Digital Power Communications is expected to generate 1.19 times more return on investment than Korea Electric. However, Digital Power is 1.19 times more volatile than Korea Electric Power. It trades about 0.05 of its potential returns per unit of risk. Korea Electric Power is currently generating about 0.03 per unit of risk. If you would invest  561,779  in Digital Power Communications on September 4, 2024 and sell it today you would earn a total of  297,221  from holding Digital Power Communications or generate 52.91% return on investment over 90 days.

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

Digital Power Communications  vs.  Korea Electric Power

Digital Power Commun

Risk-Adjusted Performance

0 of 100

Very Weak

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

Korea Electric Power

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Korea Electric Power are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Korea Electric may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Digital Power and Korea Electric

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

The idea behind Digital Power Communications and Korea Electric Power 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.