Can any of the company-specific risk be diversified away by investing in both SK Telecom and First Financial 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 SK Telecom and First Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SK Telecom Co and First Financial Northwest, you can compare the effects of market volatilities on SK Telecom and First Financial 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 SK Telecom with a short position of First Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of SK Telecom and First Financial.
Diversification Opportunities for SK Telecom and First Financial
The 3 months correlation between SKM and First is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding SK Telecom Co and First Financial Northwest in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Financial Northwest and SK Telecom 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 SK Telecom Co are associated (or correlated) with First Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Financial Northwest has no effect on the direction of SK Telecom i.e., SK Telecom and First Financial go up and down completely randomly.
Pair Corralation between SK Telecom and First Financial
Considering the 90-day investment horizon SK Telecom is expected to generate 5.32 times less return on investment than First Financial. But when comparing it to its historical volatility, SK Telecom Co is 1.03 times less risky than First Financial. It trades about 0.03 of its potential returns per unit of risk. First Financial Northwest is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 2,035 in First Financial Northwest on March 6, 2024 and sell it today you would earn a total of 71.00 from holding First Financial Northwest or generate 3.49% return on investment over 90 days.
Over the last 90 days SK Telecom Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward-looking signals, SK Telecom is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in First Financial Northwest are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, First Financial is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.