Correlation Between Western Asset and ARCA Biotechnology

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

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

Diversification Opportunities for Western Asset and ARCA Biotechnology

0.02

Correlation Coefficient

Western Asset  ARCA Biotechnology

Significant diversification

The 3 months correlation between Western and ARCA is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Investment and ARCA Biotechnology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Biotechnology and Western Asset 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 Western Asset Investment are associated (or correlated) with ARCA Biotechnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Biotechnology has no effect on the direction of Western Asset i.e., Western Asset and ARCA Biotechnology go up and down completely randomly.

Pair Corralation between Western Asset and ARCA Biotechnology

Considering the 90-day investment horizon Western Asset Investment is expected to under-perform the ARCA Biotechnology. But the stock apears to be less risky and, when comparing its historical volatility, Western Asset Investment is 2.26 times less risky than ARCA Biotechnology. The stock trades about -0.25 of its potential returns per unit of risk. The ARCA Biotechnology is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  577,073  in ARCA Biotechnology on September 25, 2024 and sell it today you would lose (460.00) from holding ARCA Biotechnology or give up 0.08% of portfolio value over 90 days.

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

Western Asset Investment  vs.  ARCA Biotechnology

Pair Trading with Western Asset and ARCA Biotechnology

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

The idea behind Western Asset Investment and ARCA Biotechnology 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..