Correlation Between ALM Equity and IAR Systems

Can any of the company-specific risk be diversified away by investing in both ALM Equity and IAR Systems 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 ALM Equity and IAR Systems into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ALM Equity AB and IAR Systems Group, you can compare the effects of market volatilities on ALM Equity and IAR Systems 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 ALM Equity with a short position of IAR Systems. Check out your portfolio center. Please also check ongoing floating volatility patterns of ALM Equity and IAR Systems.

Diversification Opportunities for ALM Equity and IAR Systems

0.16

Correlation Coefficient

ALM Equity  IAR Systems

Average diversification

The 3 months correlation between ALM and IAR is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding ALM Equity AB and IAR Systems Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IAR Systems Group and ALM Equity 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 ALM Equity AB are associated (or correlated) with IAR Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IAR Systems Group has no effect on the direction of ALM Equity i.e., ALM Equity and IAR Systems go up and down completely randomly.

Pair Corralation between ALM Equity and IAR Systems

Assuming the 90 days trading horizon ALM Equity AB is expected to under-perform the IAR Systems. But the stock apears to be less risky and, when comparing its historical volatility, ALM Equity AB is 4.48 times less risky than IAR Systems. The stock trades about -0.13 of its potential returns per unit of risk. The IAR Systems Group is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  15,700  in IAR Systems Group on September 14, 2024 and sell it today you would lose (1,000.00) from holding IAR Systems Group or give up 6.37% of portfolio value over 90 days.

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

ALM Equity AB  vs.  IAR Systems Group

ALM Equity AB

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ALM Equity AB has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, ALM Equity is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

IAR Systems Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days IAR Systems Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, IAR Systems is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with ALM Equity and IAR Systems

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

The idea behind ALM Equity AB and IAR Systems 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.