Correlation Between Nestlé SA and Coffee Holding

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

By analyzing existing cross correlation between Nestl SA and Coffee Holding Co, you can compare the effects of market volatilities on Nestlé SA and Coffee Holding 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 Nestlé SA with a short position of Coffee Holding. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nestlé SA and Coffee Holding.

Diversification Opportunities for Nestlé SA and Coffee Holding

-0.66

Correlation Coefficient

Nestlé SA  Coffee Holding

Excellent diversification

The 3 months correlation between Nestlé and Coffee is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Nestl SA and Coffee Holding Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Coffee Holding and Nestlé SA 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 Nestl SA are associated (or correlated) with Coffee Holding. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Coffee Holding has no effect on the direction of Nestlé SA i.e., Nestlé SA and Coffee Holding go up and down completely randomly.

Pair Corralation between Nestlé SA and Coffee Holding

Assuming the 90 days trading horizon Nestl SA is expected to under-perform the Coffee Holding. But the stock apears to be less risky and, when comparing its historical volatility, Nestl SA is 4.69 times less risky than Coffee Holding. The stock trades about -0.17 of its potential returns per unit of risk. The Coffee Holding Co is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  292.00  in Coffee Holding Co on September 19, 2024 and sell it today you would earn a total of  126.00  from holding Coffee Holding Co or generate 43.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

Nestl SA  vs.  Coffee Holding Co

Nestlé SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nestl SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Coffee Holding

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Coffee Holding Co are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Coffee Holding reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Nestlé SA and Coffee Holding

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

The idea behind Nestl SA and Coffee Holding Co 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.