Correlation Between DS Smith and Diversified Energy

Can any of the company-specific risk be diversified away by investing in both DS Smith and Diversified Energy 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 Diversified Energy 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 Diversified Energy, you can compare the effects of market volatilities on DS Smith and Diversified Energy 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 Diversified Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of DS Smith and Diversified Energy.

Diversification Opportunities for DS Smith and Diversified Energy

0.85

Correlation Coefficient

DS Smith  Diversified Energy

Very poor diversification

The 3 months correlation between SMDS and Diversified is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding DS Smith PLC and Diversified Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Energy 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 Diversified Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Energy has no effect on the direction of DS Smith i.e., DS Smith and Diversified Energy go up and down completely randomly.

Pair Corralation between DS Smith and Diversified Energy

Assuming the 90 days trading horizon DS Smith is expected to generate 2.28 times less return on investment than Diversified Energy. But when comparing it to its historical volatility, DS Smith PLC is 1.16 times less risky than Diversified Energy. It trades about 0.12 of its potential returns per unit of risk. Diversified Energy is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  85,431  in Diversified Energy on September 20, 2024 and sell it today you would earn a total of  39,369  from holding Diversified Energy or generate 46.08% return on investment over 90 days.

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

DS Smith PLC  vs.  Diversified Energy

DS Smith PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in DS Smith PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, DS Smith unveiled solid returns over the last few months and may actually be approaching a breakup point.

Diversified Energy

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Energy are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Diversified Energy exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DS Smith and Diversified Energy

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

The idea behind DS Smith PLC and Diversified Energy 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.