Correlation Between Gerdau SA and Encore Wire

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

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

Diversification Opportunities for Gerdau SA and Encore Wire

0.49

Correlation Coefficient

Gerdau SA  Encore Wire

Very weak diversification

The 3 months correlation between Gerdau and Encore is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Gerdau SA ADR and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire and Gerdau SA 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 Gerdau SA ADR are associated (or correlated) with Encore Wire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Wire has no effect on the direction of Gerdau SA i.e., Gerdau SA and Encore Wire go up and down completely randomly.

Pair Corralation between Gerdau SA and Encore Wire

Considering the 90-day investment horizon Gerdau SA is expected to generate 22.58 times less return on investment than Encore Wire. But when comparing it to its historical volatility, Gerdau SA ADR is 1.02 times less risky than Encore Wire. It trades about 0.01 of its potential returns per unit of risk. Encore Wire is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  19,684  in Encore Wire on February 21, 2024 and sell it today you would earn a total of  8,366  from holding Encore Wire or generate 42.5% return on investment over 90 days.

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

Gerdau SA ADR  vs.  Encore Wire

Gerdau SA ADR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Gerdau SA ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical and fundamental indicators, Gerdau SA is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Encore Wire

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Gerdau SA and Encore Wire

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

The idea behind Gerdau SA ADR and Encore Wire 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.