Correlation Between Diversified Royalty and Rocky Mountain

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

By analyzing existing cross correlation between Diversified Royalty Corp and Rocky Mountain Liquor, you can compare the effects of market volatilities on Diversified Royalty and Rocky Mountain 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 Diversified Royalty with a short position of Rocky Mountain. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diversified Royalty and Rocky Mountain.

Diversification Opportunities for Diversified Royalty and Rocky Mountain

-0.07

Correlation Coefficient

Diversified Royalty  Rocky Mountain

Good diversification

The 3 months correlation between Diversified and Rocky is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Royalty Corp and Rocky Mountain Liquor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rocky Mountain Liquor and Diversified Royalty 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 Diversified Royalty Corp are associated (or correlated) with Rocky Mountain. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rocky Mountain Liquor has no effect on the direction of Diversified Royalty i.e., Diversified Royalty and Rocky Mountain go up and down completely randomly.

Pair Corralation between Diversified Royalty and Rocky Mountain

Assuming the 90 days trading horizon Diversified Royalty is expected to generate 1.27 times less return on investment than Rocky Mountain. But when comparing it to its historical volatility, Diversified Royalty Corp is 4.65 times less risky than Rocky Mountain. It trades about 0.21 of its potential returns per unit of risk. Rocky Mountain Liquor is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  12.00  in Rocky Mountain Liquor on September 3, 2024 and sell it today you would earn a total of  1.00  from holding Rocky Mountain Liquor or generate 8.33% return on investment over 90 days.

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

Diversified Royalty Corp  vs.  Rocky Mountain Liquor

Diversified Royalty Corp

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Royalty Corp are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Diversified Royalty may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Rocky Mountain Liquor

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rocky Mountain Liquor are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Rocky Mountain may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Diversified Royalty and Rocky Mountain

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

The idea behind Diversified Royalty Corp and Rocky Mountain Liquor 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.