Correlation Between Stepan and Smith Douglas

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

By analyzing existing cross correlation between Stepan Company and Smith Douglas Homes, you can compare the effects of market volatilities on Stepan and Smith Douglas 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 Smith Douglas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and Smith Douglas.

Diversification Opportunities for Stepan and Smith Douglas

0.16

Correlation Coefficient

Stepan  Smith Douglas

Average diversification

The 3 months correlation between Stepan and Smith is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and Smith Douglas Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Douglas Homes 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 Smith Douglas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Douglas Homes has no effect on the direction of Stepan i.e., Stepan and Smith Douglas go up and down completely randomly.

Pair Corralation between Stepan and Smith Douglas

Considering the 90-day investment horizon Stepan Company is expected to generate 0.59 times more return on investment than Smith Douglas. However, Stepan Company is 1.69 times less risky than Smith Douglas. It trades about 0.04 of its potential returns per unit of risk. Smith Douglas Homes is currently generating about 0.01 per unit of risk. If you would invest  7,272  in Stepan Company on September 5, 2024 and sell it today you would earn a total of  246.00  from holding Stepan Company or generate 3.38% return on investment over 90 days.

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

Stepan Company  vs.  Smith Douglas Homes

Stepan Company

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Stepan Company are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent fundamental indicators, Stepan is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Smith Douglas Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Douglas Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, Smith Douglas is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Stepan and Smith Douglas

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

The idea behind Stepan Company and Smith Douglas Homes 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.