Can any of the company-specific risk be diversified away by investing in both Amgen and Olympic Steel 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 Amgen and Olympic Steel into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Amgen Inc and Olympic Steel, you can compare the effects of market volatilities on Amgen and Olympic Steel 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 Amgen with a short position of Olympic Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amgen and Olympic Steel.
Diversification Opportunities for Amgen and Olympic Steel
The 3 months correlation between Amgen and Olympic is -0.9. Overlapping area represents the amount of risk that can be diversified away by holding Amgen Inc and Olympic Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Olympic Steel and Amgen 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 Amgen Inc are associated (or correlated) with Olympic Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Olympic Steel has no effect on the direction of Amgen i.e., Amgen and Olympic Steel go up and down completely randomly.
Given the investment horizon of 90 days Amgen Inc is expected to generate 0.89 times more return on investment than Olympic Steel. However, Amgen Inc is 1.12 times less risky than Olympic Steel. It trades about 0.16 of its potential returns per unit of risk. Olympic Steel is currently generating about -0.32 per unit of risk. If you would invest 26,805 in Amgen Inc on March 6, 2024 and sell it today you would earn a total of 3,937 from holding Amgen Inc or generate 14.69% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Amgen Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady technical and fundamental indicators, Amgen displayed solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Olympic Steel has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in July 2024. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.