Correlation Between Stepan and Lake Resources

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

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

Diversification Opportunities for Stepan and Lake Resources

-0.12

Correlation Coefficient

Stepan  Lake Resources

Good diversification

The 3 months correlation between Stepan and Lake is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and Lake Resources NL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lake Resources NL and Stepan 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 Stepan Company are associated (or correlated) with Lake Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lake Resources NL has no effect on the direction of Stepan i.e., Stepan and Lake Resources go up and down completely randomly.

Pair Corralation between Stepan and Lake Resources

Considering the 90-day investment horizon Stepan Company is expected to under-perform the Lake Resources. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 6.28 times less risky than Lake Resources. The stock trades about -0.09 of its potential returns per unit of risk. The Lake Resources NL is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2.45  in Lake Resources NL on September 23, 2024 and sell it today you would earn a total of  0.27  from holding Lake Resources NL or generate 11.02% return on investment over 90 days.

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

Stepan Company  vs.  Lake Resources NL

Stepan Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Stepan Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's fundamental indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Lake Resources NL

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Lake Resources NL are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly conflicting forward-looking signals, Lake Resources reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Stepan and Lake Resources

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

The idea behind Stepan Company and Lake Resources NL 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.