Correlation Between Diageo PLC and London Stock

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

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

Diversification Opportunities for Diageo PLC and London Stock

-0.47

Correlation Coefficient

Diageo PLC  London Stock

Very good diversification

The 3 months correlation between Diageo and London is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange and Diageo PLC 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 Diageo PLC are associated (or correlated) with London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of Diageo PLC i.e., Diageo PLC and London Stock go up and down completely randomly.

Pair Corralation between Diageo PLC and London Stock

Assuming the 90 days trading horizon Diageo PLC is expected to generate 7.02 times less return on investment than London Stock. In addition to that, Diageo PLC is 1.58 times more volatile than London Stock Exchange. It trades about 0.02 of its total potential returns per unit of risk. London Stock Exchange is currently generating about 0.19 per unit of volatility. If you would invest  1,031,500  in London Stock Exchange on September 20, 2024 and sell it today you would earn a total of  118,000  from holding London Stock Exchange or generate 11.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Diageo PLC  vs.  London Stock Exchange

Diageo PLC

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Diageo PLC are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

London Stock Exchange

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, London Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Diageo PLC and London Stock

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

The idea behind Diageo PLC and London Stock Exchange 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.