Correlation Between Korea Investment and Korean Air

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

By analyzing existing cross correlation between Korea Investment Holdings and Korean Air Lines, you can compare the effects of market volatilities on Korea Investment and Korean Air 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 Korea Investment with a short position of Korean Air. Check out your portfolio center. Please also check ongoing floating volatility patterns of Korea Investment and Korean Air.

Diversification Opportunities for Korea Investment and Korean Air

0.78

Correlation Coefficient

Korea Investment  Korean Air

Poor diversification

The 3 months correlation between Korea and Korean is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Korea Investment Holdings and Korean Air Lines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Korean Air Lines and Korea Investment 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 Korea Investment Holdings are associated (or correlated) with Korean Air. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Korean Air Lines has no effect on the direction of Korea Investment i.e., Korea Investment and Korean Air go up and down completely randomly.

Pair Corralation between Korea Investment and Korean Air

Assuming the 90 days trading horizon Korea Investment is expected to generate 1.76 times less return on investment than Korean Air. But when comparing it to its historical volatility, Korea Investment Holdings is 1.15 times less risky than Korean Air. It trades about 0.04 of its potential returns per unit of risk. Korean Air Lines is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,270,000  in Korean Air Lines on September 26, 2024 and sell it today you would earn a total of  125,000  from holding Korean Air Lines or generate 5.51% return on investment over 90 days.

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

Korea Investment Holdings  vs.  Korean Air Lines

Korea Investment Holdings

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Korea Investment Holdings are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Korea Investment is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Korean Air Lines

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Korean Air Lines are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Korean Air may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Korea Investment and Korean Air

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

The idea behind Korea Investment Holdings and Korean Air Lines 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.