Correlation Between Elco and Razor Labs

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

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

Diversification Opportunities for Elco and Razor Labs

0.2

Correlation Coefficient

Elco  Razor Labs

Modest diversification

The 3 months correlation between Elco and Razor is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Elco and Razor Labs in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Razor Labs and Elco 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 Elco are associated (or correlated) with Razor Labs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Razor Labs has no effect on the direction of Elco i.e., Elco and Razor Labs go up and down completely randomly.

Pair Corralation between Elco and Razor Labs

Assuming the 90 days trading horizon Elco is expected to generate 0.32 times more return on investment than Razor Labs. However, Elco is 3.11 times less risky than Razor Labs. It trades about 0.38 of its potential returns per unit of risk. Razor Labs is currently generating about 0.11 per unit of risk. If you would invest  1,065,000  in Elco on September 25, 2024 and sell it today you would earn a total of  420,000  from holding Elco or generate 39.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	97.83%
Values	Daily Returns

Elco  vs.  Razor Labs

Elco

Risk-Adjusted Performance

30 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Elco are ranked lower than 30 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Elco sustained solid returns over the last few months and may actually be approaching a breakup point.

Razor Labs

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Razor Labs are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Razor Labs sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Elco and Razor Labs

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

The idea behind Elco and Razor Labs 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.