Correlation Between Sims Metal and Contact Energy

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

By analyzing existing cross correlation between Sims Metal Management and Contact Energy Limited, you can compare the effects of market volatilities on Sims Metal and Contact Energy 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 Sims Metal with a short position of Contact Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sims Metal and Contact Energy.

Diversification Opportunities for Sims Metal and Contact Energy

0.3

Correlation Coefficient

Sims Metal  Contact Energy

Weak diversification

The 3 months correlation between Sims and Contact is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Sims Metal Management and Contact Energy Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Contact Energy and Sims Metal 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 Sims Metal Management are associated (or correlated) with Contact Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Contact Energy has no effect on the direction of Sims Metal i.e., Sims Metal and Contact Energy go up and down completely randomly.

Pair Corralation between Sims Metal and Contact Energy

Assuming the 90 days horizon Sims Metal Management is expected to under-perform the Contact Energy. In addition to that, Sims Metal is 1.39 times more volatile than Contact Energy Limited. It trades about -0.01 of its total potential returns per unit of risk. Contact Energy Limited is currently generating about 0.04 per unit of volatility. If you would invest  394.00  in Contact Energy Limited on September 30, 2024 and sell it today you would earn a total of  70.00  from holding Contact Energy Limited or generate 17.77% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.73%
Values	Daily Returns

Sims Metal Management  vs.  Contact Energy Limited

Sims Metal Management

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sims Metal Management has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Sims Metal is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Contact Energy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Contact Energy Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Contact Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Sims Metal and Contact Energy

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

The idea behind Sims Metal Management and Contact Energy Limited 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.