Correlation Between African Rainbow and Life Healthcare

Can any of the company-specific risk be diversified away by investing in both African Rainbow and Life Healthcare 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 African Rainbow and Life Healthcare into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between African Rainbow Capital and Life Healthcare, you can compare the effects of market volatilities on African Rainbow and Life Healthcare 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 African Rainbow with a short position of Life Healthcare. Check out your portfolio center. Please also check ongoing floating volatility patterns of African Rainbow and Life Healthcare.

Diversification Opportunities for African Rainbow and Life Healthcare

0.67

Correlation Coefficient

African Rainbow  Life Healthcare

Poor diversification

The 3 months correlation between African and Life is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding African Rainbow Capital and Life Healthcare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Life Healthcare and African Rainbow 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 African Rainbow Capital are associated (or correlated) with Life Healthcare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Life Healthcare has no effect on the direction of African Rainbow i.e., African Rainbow and Life Healthcare go up and down completely randomly.

Pair Corralation between African Rainbow and Life Healthcare

Assuming the 90 days trading horizon African Rainbow is expected to generate 2.23 times less return on investment than Life Healthcare. But when comparing it to its historical volatility, African Rainbow Capital is 1.16 times less risky than Life Healthcare. It trades about 0.1 of its potential returns per unit of risk. Life Healthcare is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  140,000  in Life Healthcare on September 13, 2024 and sell it today you would earn a total of  34,500  from holding Life Healthcare or generate 24.64% return on investment over 90 days.

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

African Rainbow Capital  vs.  Life Healthcare

African Rainbow Capital

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in African Rainbow Capital are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, African Rainbow may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Life Healthcare

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Life Healthcare are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Life Healthcare exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with African Rainbow and Life Healthcare

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

The idea behind African Rainbow Capital and Life Healthcare 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.

Check out your portfolio center.

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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.