Correlation Between Tokai Carbon and SFA Engineering

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

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

Diversification Opportunities for Tokai Carbon and SFA Engineering

0.71

Correlation Coefficient

Tokai Carbon  SFA Engineering

Poor diversification

The 3 months correlation between Tokai and SFA is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Tokai Carbon Korea and SFA Engineering in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SFA Engineering and Tokai Carbon 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 Tokai Carbon Korea are associated (or correlated) with SFA Engineering. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SFA Engineering has no effect on the direction of Tokai Carbon i.e., Tokai Carbon and SFA Engineering go up and down completely randomly.

Pair Corralation between Tokai Carbon and SFA Engineering

Assuming the 90 days trading horizon Tokai Carbon Korea is expected to under-perform the SFA Engineering. But the stock apears to be less risky and, when comparing its historical volatility, Tokai Carbon Korea is 1.28 times less risky than SFA Engineering. The stock trades about -0.22 of its potential returns per unit of risk. The SFA Engineering is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  2,450,000  in SFA Engineering on September 3, 2024 and sell it today you would lose (320,000) from holding SFA Engineering or give up 13.06% of portfolio value over 90 days.

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

Tokai Carbon Korea  vs.  SFA Engineering

Tokai Carbon Korea

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tokai Carbon Korea 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 basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

SFA Engineering

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SFA Engineering has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Tokai Carbon and SFA Engineering

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

The idea behind Tokai Carbon Korea and SFA Engineering 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.