Correlation Between IPG Photonics and Wesfarmers

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

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

Diversification Opportunities for IPG Photonics and Wesfarmers

-0.49

Correlation Coefficient

IPG Photonics  Wesfarmers

Very good diversification

The 3 months correlation between IPG and Wesfarmers is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding IPG Photonics and Wesfarmers Ltd ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers ADR and IPG Photonics 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 IPG Photonics are associated (or correlated) with Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers ADR has no effect on the direction of IPG Photonics i.e., IPG Photonics and Wesfarmers go up and down completely randomly.

Pair Corralation between IPG Photonics and Wesfarmers

Given the investment horizon of 90 days IPG Photonics is expected to generate 1.48 times more return on investment than Wesfarmers. However, IPG Photonics is 1.48 times more volatile than Wesfarmers Ltd ADR. It trades about 0.13 of its potential returns per unit of risk. Wesfarmers Ltd ADR is currently generating about 0.0 per unit of risk. If you would invest  6,543  in IPG Photonics on September 3, 2024 and sell it today you would earn a total of  1,261  from holding IPG Photonics or generate 19.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

IPG Photonics  vs.  Wesfarmers Ltd ADR

IPG Photonics

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in IPG Photonics are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical and fundamental indicators, IPG Photonics reported solid returns over the last few months and may actually be approaching a breakup point.

Wesfarmers ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wesfarmers Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Wesfarmers is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IPG Photonics and Wesfarmers

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

The idea behind IPG Photonics and Wesfarmers Ltd 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.