Correlation Between Australian Dairy and EP Financial

Can any of the company-specific risk be diversified away by investing in both Australian Dairy and EP Financial 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 Australian Dairy and EP Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Australian Dairy Farms and EP Financial Group, you can compare the effects of market volatilities on Australian Dairy and EP Financial 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 Australian Dairy with a short position of EP Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian Dairy and EP Financial.

Diversification Opportunities for Australian Dairy and EP Financial

0.51

Correlation Coefficient

Australian Dairy  EP Financial

Very weak diversification

The 3 months correlation between Australian and EP1 is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Australian Dairy Farms and EP Financial Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EP Financial Group and Australian Dairy 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 Australian Dairy Farms are associated (or correlated) with EP Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EP Financial Group has no effect on the direction of Australian Dairy i.e., Australian Dairy and EP Financial go up and down completely randomly.

Pair Corralation between Australian Dairy and EP Financial

Assuming the 90 days trading horizon Australian Dairy Farms is expected to generate 1.96 times more return on investment than EP Financial. However, Australian Dairy is 1.96 times more volatile than EP Financial Group. It trades about 0.2 of its potential returns per unit of risk. EP Financial Group is currently generating about 0.1 per unit of risk. If you would invest  1.90  in Australian Dairy Farms on September 12, 2024 and sell it today you would earn a total of  2.10  from holding Australian Dairy Farms or generate 110.53% return on investment over 90 days.

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

Australian Dairy Farms  vs.  EP Financial Group

Australian Dairy Farms

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Australian Dairy Farms are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Australian Dairy unveiled solid returns over the last few months and may actually be approaching a breakup point.

EP Financial Group

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in EP Financial Group are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, EP Financial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Australian Dairy and EP Financial

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

The idea behind Australian Dairy Farms and EP Financial 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.