Can any of the company-specific risk be diversified away by investing in both Visa and Shell PLC 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 Visa and Shell PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Visa Class A and Shell PLC, you can compare the effects of market volatilities on Visa and Shell PLC 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 Visa with a short position of Shell PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Visa and Shell PLC.
Diversification Opportunities for Visa and Shell PLC
The 3 months correlation between Visa and Shell is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A and Shell PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shell PLC and Visa 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 Visa Class A are associated (or correlated) with Shell PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shell PLC has no effect on the direction of Visa i.e., Visa and Shell PLC go up and down completely randomly.
Taking into account the 90-day investment horizon Visa is expected to generate 1.21 times less return on investment than Shell PLC. But when comparing it to its historical volatility, Visa Class A is 3.15 times less risky than Shell PLC. It trades about 0.1 of its potential returns per unit of risk. Shell PLC is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 3,185 in Shell PLC on March 6, 2024 and sell it today you would earn a total of 300.00 from holding Shell PLC or generate 9.42% return on investment over 90 days.
Over the last 90 days Visa Class A has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Visa is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Shell PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating basic indicators, Shell PLC reported solid returns over the last few months and may actually be approaching a breakup point.