Correlation Between Derwent London and DS Smith

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

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

Diversification Opportunities for Derwent London and DS Smith

-0.84

Correlation Coefficient

Derwent London  DS Smith

Pay attention - limited upside

The 3 months correlation between Derwent and SMDS is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Derwent London PLC and DS Smith PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DS Smith PLC and Derwent London 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 Derwent London PLC are associated (or correlated) with DS Smith. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DS Smith PLC has no effect on the direction of Derwent London i.e., Derwent London and DS Smith go up and down completely randomly.

Pair Corralation between Derwent London and DS Smith

Assuming the 90 days trading horizon Derwent London PLC is expected to under-perform the DS Smith. But the stock apears to be less risky and, when comparing its historical volatility, Derwent London PLC is 1.86 times less risky than DS Smith. The stock trades about -0.28 of its potential returns per unit of risk. The DS Smith PLC is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  47,903  in DS Smith PLC on September 19, 2024 and sell it today you would earn a total of  6,447  from holding DS Smith PLC or generate 13.46% return on investment over 90 days.

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

Derwent London PLC  vs.  DS Smith PLC

Derwent London PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Derwent London PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

DS Smith PLC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in DS Smith PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, DS Smith unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Derwent London and DS Smith

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

The idea behind Derwent London PLC and DS Smith PLC 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.