Correlation Between Honest and L’Oreal Co

Can any of the company-specific risk be diversified away by investing in both Honest and L’Oreal Co 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 Honest and L’Oreal Co into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Honest Company and LOreal Co ADR, you can compare the effects of market volatilities on Honest and L’Oreal Co 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 Honest with a short position of L’Oreal Co. Check out your portfolio center. Please also check ongoing floating volatility patterns of Honest and L’Oreal Co.

Diversification Opportunities for Honest and L’Oreal Co

-0.78

Correlation Coefficient

Honest  L’Oreal Co

Pay attention - limited upside

The 3 months correlation between Honest and L’Oreal is -0.78. Overlapping area represents the amount of risk that can be diversified away by holding Honest Company and LOreal Co ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LOreal Co ADR and Honest 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 Honest Company are associated (or correlated) with L’Oreal Co. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LOreal Co ADR has no effect on the direction of Honest i.e., Honest and L’Oreal Co go up and down completely randomly.

Pair Corralation between Honest and L’Oreal Co

Given the investment horizon of 90 days Honest Company is expected to generate 2.29 times more return on investment than L’Oreal Co. However, Honest is 2.29 times more volatile than LOreal Co ADR. It trades about 0.25 of its potential returns per unit of risk. LOreal Co ADR is currently generating about -0.16 per unit of risk. If you would invest  415.00  in Honest Company on September 5, 2024 and sell it today you would earn a total of  386.00  from holding Honest Company or generate 93.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

Honest Company  vs.  LOreal Co ADR

Honest Company

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Honest Company are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting basic indicators, Honest unveiled solid returns over the last few months and may actually be approaching a breakup point.

LOreal Co ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LOreal Co ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Honest and L’Oreal Co

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

The idea behind Honest Company and LOreal Co ADR 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.