Correlation Between ARCA Biotechnology and Western Asset

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

By analyzing existing cross correlation between ARCA Biotechnology and Western Asset Investment, you can compare the effects of market volatilities on ARCA Biotechnology and Western Asset 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 ARCA Biotechnology with a short position of Western Asset. Check out your portfolio center. Please also check ongoing floating volatility patterns of ARCA Biotechnology and Western Asset.

Diversification Opportunities for ARCA Biotechnology and Western Asset

0.02

Correlation Coefficient

ARCA Biotechnology  Western Asset

Significant diversification

The 3 months correlation between ARCA and Western is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding ARCA Biotechnology and Western Asset Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Asset Investment and ARCA Biotechnology 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 ARCA Biotechnology are associated (or correlated) with Western Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Asset Investment has no effect on the direction of ARCA Biotechnology i.e., ARCA Biotechnology and Western Asset go up and down completely randomly.

Pair Corralation between ARCA Biotechnology and Western Asset

Assuming the 90 days trading horizon ARCA Biotechnology is expected to generate 2.26 times more return on investment than Western Asset. However, ARCA Biotechnology is 2.26 times more volatile than Western Asset Investment. It trades about 0.01 of its potential returns per unit of risk. Western Asset Investment is currently generating about -0.25 per unit of risk. If you would invest  577,073  in ARCA Biotechnology on September 25, 2024 and sell it today you would lose (460.00) from holding ARCA Biotechnology or give up 0.08% of portfolio value over 90 days.

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

ARCA Biotechnology  vs.  Western Asset Investment

Pair Trading with ARCA Biotechnology and Western Asset

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

The idea behind ARCA Biotechnology and Western Asset Investment 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.