Correlation Between Administradora Americana and LATAM Airlines

Can any of the company-specific risk be diversified away by investing in both Administradora Americana and LATAM Airlines 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 Administradora Americana and LATAM Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Administradora Americana de and LATAM Airlines Group, you can compare the effects of market volatilities on Administradora Americana and LATAM Airlines 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 Administradora Americana with a short position of LATAM Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Administradora Americana and LATAM Airlines.

Diversification Opportunities for Administradora Americana and LATAM Airlines

0.7

Correlation Coefficient

Administradora Americana  LATAM Airlines

Poor diversification

The 3 months correlation between Administradora and LATAM is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Administradora Americana de and LATAM Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LATAM Airlines Group and Administradora Americana 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 Administradora Americana de are associated (or correlated) with LATAM Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LATAM Airlines Group has no effect on the direction of Administradora Americana i.e., Administradora Americana and LATAM Airlines go up and down completely randomly.

Pair Corralation between Administradora Americana and LATAM Airlines

Assuming the 90 days trading horizon Administradora Americana is expected to generate 1.18 times less return on investment than LATAM Airlines. But when comparing it to its historical volatility, Administradora Americana de is 1.1 times less risky than LATAM Airlines. It trades about 0.14 of its potential returns per unit of risk. LATAM Airlines Group is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1,185  in LATAM Airlines Group on September 2, 2024 and sell it today you would earn a total of  165.00  from holding LATAM Airlines Group or generate 13.92% return on investment over 90 days.

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

Administradora Americana de  vs.  LATAM Airlines Group

Administradora Americana

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Administradora Americana de are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Administradora Americana may actually be approaching a critical reversion point that can send shares even higher in January 2025.

LATAM Airlines Group

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in LATAM Airlines Group are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting primary indicators, LATAM Airlines displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Administradora Americana and LATAM Airlines

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

The idea behind Administradora Americana de and LATAM Airlines Group 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.