Can any of the company-specific risk be diversified away by investing in both BASF SE and AIR LIQUIDE 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 BASF SE and AIR LIQUIDE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BASF SE and AIR LIQUIDE ADR, you can compare the effects of market volatilities on BASF SE and AIR LIQUIDE 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 BASF SE with a short position of AIR LIQUIDE. Check out your portfolio center. Please also check ongoing floating volatility patterns of BASF SE and AIR LIQUIDE.
Diversification Opportunities for BASF SE and AIR LIQUIDE
The 3 months correlation between BASF and AIR is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding BASF SE and AIR LIQUIDE ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AIR LIQUIDE ADR and BASF SE 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 BASF SE are associated (or correlated) with AIR LIQUIDE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AIR LIQUIDE ADR has no effect on the direction of BASF SE i.e., BASF SE and AIR LIQUIDE go up and down completely randomly.
Assuming the 90 days trading horizon BASF SE is expected to generate 1.17 times more return on investment than AIR LIQUIDE. However, BASF SE is 1.17 times more volatile than AIR LIQUIDE ADR. It trades about 0.08 of its potential returns per unit of risk. AIR LIQUIDE ADR is currently generating about -0.02 per unit of risk. If you would invest 4,529 in BASF SE on March 6, 2024 and sell it today you would earn a total of 265.00 from holding BASF SE or generate 5.85% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in BASF SE are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, BASF SE may actually be approaching a critical reversion point that can send shares even higher in July 2024.
Over the last 90 days AIR LIQUIDE ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, AIR LIQUIDE is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.