Correlation Between Cool and Toro

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

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

Diversification Opportunities for Cool and Toro

0.76

Correlation Coefficient

Cool  Toro

Poor diversification

The 3 months correlation between Cool and Toro is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Cool Company and Toro in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toro and Cool 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 Cool Company are associated (or correlated) with Toro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toro has no effect on the direction of Cool i.e., Cool and Toro go up and down completely randomly.

Pair Corralation between Cool and Toro

Given the investment horizon of 90 days Cool Company is expected to under-perform the Toro. In addition to that, Cool is 1.03 times more volatile than Toro. It trades about -0.22 of its total potential returns per unit of risk. Toro is currently generating about -0.18 per unit of volatility. If you would invest  340.00  in Toro on September 4, 2024 and sell it today you would lose (93.00) from holding Toro or give up 27.35% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Cool Company  vs.  Toro

Cool Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cool Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's fundamental indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Toro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toro has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Cool and Toro

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

The idea behind Cool Company and Toro 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.