Correlation Between Forest Water and Sunny Friend

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

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

Diversification Opportunities for Forest Water and Sunny Friend

-0.32

Correlation Coefficient

Forest Water  Sunny Friend

Very good diversification

The 3 months correlation between Forest and Sunny is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Forest Water Environmental and Sunny Friend Environmental in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sunny Friend Environ and Forest Water 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 Forest Water Environmental are associated (or correlated) with Sunny Friend. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sunny Friend Environ has no effect on the direction of Forest Water i.e., Forest Water and Sunny Friend go up and down completely randomly.

Pair Corralation between Forest Water and Sunny Friend

Assuming the 90 days trading horizon Forest Water Environmental is expected to under-perform the Sunny Friend. But the stock apears to be less risky and, when comparing its historical volatility, Forest Water Environmental is 1.17 times less risky than Sunny Friend. The stock trades about -0.23 of its potential returns per unit of risk. The Sunny Friend Environmental is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  9,290  in Sunny Friend Environmental on September 3, 2024 and sell it today you would lose (280.00) from holding Sunny Friend Environmental or give up 3.01% of portfolio value over 90 days.

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

Forest Water Environmental  vs.  Sunny Friend Environmental

Forest Water Environ

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Forest Water Environmental has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Sunny Friend Environ

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sunny Friend Environmental has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Sunny Friend is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Forest Water and Sunny Friend

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

The idea behind Forest Water Environmental and Sunny Friend Environmental 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.