Correlation Between DS Smith and Baltic Panamax

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

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

Diversification Opportunities for DS Smith and Baltic Panamax

-0.84

Correlation Coefficient

DS Smith  Baltic Panamax

Pay attention - limited upside

The 3 months correlation between SMDS and Baltic is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding DS Smith PLC and Baltic Panamax in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Baltic Panamax and DS Smith 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 DS Smith PLC are associated (or correlated) with Baltic Panamax. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Baltic Panamax has no effect on the direction of DS Smith i.e., DS Smith and Baltic Panamax go up and down completely randomly.

Pair Corralation between DS Smith and Baltic Panamax

Assuming the 90 days trading horizon DS Smith PLC is expected to generate 0.47 times more return on investment than Baltic Panamax. However, DS Smith PLC is 2.14 times less risky than Baltic Panamax. It trades about -0.15 of its potential returns per unit of risk. Baltic Panamax is currently generating about -0.23 per unit of risk. If you would invest  56,542  in DS Smith PLC on September 18, 2024 and sell it today you would lose (2,192) from holding DS Smith PLC or give up 3.88% of portfolio value over 90 days.

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

DS Smith PLC  vs.  Baltic Panamax

Pair Trading with DS Smith and Baltic Panamax

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

The idea behind DS Smith PLC and Baltic Panamax 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.

Check out your portfolio center.

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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.