Correlation Between BEL Small and Warehouses

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

By analyzing existing cross correlation between BEL Small and Warehouses de Pauw, you can compare the effects of market volatilities on BEL Small and Warehouses 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 BEL Small with a short position of Warehouses. Check out your portfolio center. Please also check ongoing floating volatility patterns of BEL Small and Warehouses.

Diversification Opportunities for BEL Small and Warehouses

0.89

Correlation Coefficient

BEL Small  Warehouses

Very poor diversification

The 3 months correlation between BEL and Warehouses is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding BEL Small and Warehouses de Pauw in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Warehouses de Pauw and BEL Small 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 BEL Small are associated (or correlated) with Warehouses. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Warehouses de Pauw has no effect on the direction of BEL Small i.e., BEL Small and Warehouses go up and down completely randomly.

Pair Corralation between BEL Small and Warehouses

Assuming the 90 days trading horizon BEL Small is expected to generate 0.37 times more return on investment than Warehouses. However, BEL Small is 2.69 times less risky than Warehouses. It trades about -0.26 of its potential returns per unit of risk. Warehouses de Pauw is currently generating about -0.22 per unit of risk. If you would invest  879,515  in BEL Small on September 12, 2024 and sell it today you would lose (76,282) from holding BEL Small or give up 8.67% of portfolio value over 90 days.

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

BEL Small  vs.  Warehouses de Pauw

Pair Trading with BEL Small and Warehouses

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

The idea behind BEL Small and Warehouses de Pauw 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.