Correlation Between Wesfarmers and Rea

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

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

Diversification Opportunities for Wesfarmers and Rea

0.42

Correlation Coefficient

Wesfarmers  Rea

Very weak diversification

The 3 months correlation between Wesfarmers and Rea is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Wesfarmers and Rea Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rea Group and Wesfarmers 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 Wesfarmers are associated (or correlated) with Rea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rea Group has no effect on the direction of Wesfarmers i.e., Wesfarmers and Rea go up and down completely randomly.

Pair Corralation between Wesfarmers and Rea

Assuming the 90 days trading horizon Wesfarmers is expected to generate 5.17 times less return on investment than Rea. But when comparing it to its historical volatility, Wesfarmers is 1.13 times less risky than Rea. It trades about 0.04 of its potential returns per unit of risk. Rea Group is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  19,374  in Rea Group on September 24, 2024 and sell it today you would earn a total of  3,918  from holding Rea Group or generate 20.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.48%
Values	Daily Returns

Wesfarmers  vs.  Rea Group

Wesfarmers

Risk-Adjusted Performance

3 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Wesfarmers are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Wesfarmers is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Rea Group

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rea Group are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Rea unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Wesfarmers and Rea

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

The idea behind Wesfarmers and Rea Group 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.