Correlation Between Australian Agricultural and Sims Metal

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

By analyzing existing cross correlation between Australian Agricultural and Sims Metal Management, you can compare the effects of market volatilities on Australian Agricultural and Sims Metal 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 Agricultural with a short position of Sims Metal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian Agricultural and Sims Metal.

Diversification Opportunities for Australian Agricultural and Sims Metal

0.01

Correlation Coefficient

Australian Agricultural  Sims Metal

Significant diversification

The 3 months correlation between Australian and Sims is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Australian Agricultural and Sims Metal Management in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sims Metal Management and Australian Agricultural 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 Agricultural are associated (or correlated) with Sims Metal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sims Metal Management has no effect on the direction of Australian Agricultural i.e., Australian Agricultural and Sims Metal go up and down completely randomly.

Pair Corralation between Australian Agricultural and Sims Metal

Assuming the 90 days horizon Australian Agricultural is expected to generate 0.97 times more return on investment than Sims Metal. However, Australian Agricultural is 1.03 times less risky than Sims Metal. It trades about -0.02 of its potential returns per unit of risk. Sims Metal Management is currently generating about -0.03 per unit of risk. If you would invest  84.00  in Australian Agricultural on September 13, 2024 and sell it today you would lose (1.00) from holding Australian Agricultural or give up 1.19% of portfolio value over 90 days.

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

Australian Agricultural  vs.  Sims Metal Management

Australian Agricultural

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Australian Agricultural has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Australian Agricultural is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Sims Metal Management

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sims Metal Management are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sims Metal reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Australian Agricultural and Sims Metal

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

The idea behind Australian Agricultural and Sims Metal Management 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.