Correlation Between Pennant and Pao

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

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

Diversification Opportunities for Pennant and Pao

0.49

Correlation Coefficient

Pennant  Pao

Very weak diversification

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

Pair Corralation between Pennant and Pao

Given the investment horizon of 90 days Pennant Group is expected to under-perform the Pao. But the stock apears to be less risky and, when comparing its historical volatility, Pennant Group is 5.63 times less risky than Pao. The stock trades about -0.05 of its potential returns per unit of risk. The Pao Group is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  0.05  in Pao Group on September 12, 2024 and sell it today you would lose (0.02) from holding Pao Group or give up 40.0% of portfolio value over 90 days.

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

Pennant Group  vs.  Pao Group

Pennant Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pennant Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady 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.

Pao Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pao Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly weak basic indicators, Pao may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Pennant and Pao

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

The idea behind Pennant Group and Pao Group 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.