Correlation Between Common Stock and Fam Value

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

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

Diversification Opportunities for Common Stock and Fam Value

0.92

Correlation Coefficient

Common Stock  Fam Value

Almost no diversification

The 3 months correlation between Common and Fam is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Common Stock Fund and Fam Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fam Value Fund and Common Stock 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 Common Stock Fund are associated (or correlated) with Fam Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fam Value Fund has no effect on the direction of Common Stock i.e., Common Stock and Fam Value go up and down completely randomly.

Pair Corralation between Common Stock and Fam Value

Assuming the 90 days horizon Common Stock is expected to generate 1.05 times less return on investment than Fam Value. In addition to that, Common Stock is 1.2 times more volatile than Fam Value Fund. It trades about 0.08 of its total potential returns per unit of risk. Fam Value Fund is currently generating about 0.1 per unit of volatility. If you would invest  9,225  in Fam Value Fund on September 4, 2024 and sell it today you would earn a total of  2,008  from holding Fam Value Fund or generate 21.77% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.6%
Values	Daily Returns

Common Stock Fund  vs.  Fam Value Fund

Common Stock

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Common Stock Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Common Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Fam Value Fund

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Fam Value Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Fam Value may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Common Stock and Fam Value

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

The idea behind Common Stock Fund and Fam Value Fund 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.