Correlation Between Tencent Music and LB Foster

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

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

Diversification Opportunities for Tencent Music and LB Foster

0.06

Correlation Coefficient

Tencent Music  LB Foster

Significant diversification

The 3 months correlation between Tencent and FSTR is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Tencent Music Entertainment and LB Foster in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LB Foster and Tencent Music 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 Tencent Music Entertainment are associated (or correlated) with LB Foster. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LB Foster has no effect on the direction of Tencent Music i.e., Tencent Music and LB Foster go up and down completely randomly.

Pair Corralation between Tencent Music and LB Foster

Considering the 90-day investment horizon Tencent Music is expected to generate 1.77 times less return on investment than LB Foster. In addition to that, Tencent Music is 1.31 times more volatile than LB Foster. It trades about 0.09 of its total potential returns per unit of risk. LB Foster is currently generating about 0.21 per unit of volatility. If you would invest  2,007  in LB Foster on September 18, 2024 and sell it today you would earn a total of  889.00  from holding LB Foster or generate 44.29% return on investment over 90 days.

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

Tencent Music Entertainment  vs.  LB Foster

Tencent Music Entert

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tencent Music Entertainment are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, Tencent Music exhibited solid returns over the last few months and may actually be approaching a breakup point.

LB Foster

Risk-Adjusted Performance

16 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in LB Foster are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, LB Foster reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tencent Music and LB Foster

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

The idea behind Tencent Music Entertainment and LB Foster 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.