Can any of the company-specific risk be diversified away by investing in both AB Volvo and Investor 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 AB Volvo and Investor into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between AB Volvo and Investor AB ser, you can compare the effects of market volatilities on AB Volvo and Investor 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 AB Volvo with a short position of Investor. Check out your portfolio center. Please also check ongoing floating volatility patterns of AB Volvo and Investor.
Diversification Opportunities for AB Volvo and Investor
The 3 months correlation between VOLV-A and Investor is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding AB Volvo and Investor AB ser in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investor AB ser and AB Volvo 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 AB Volvo are associated (or correlated) with Investor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investor AB ser has no effect on the direction of AB Volvo i.e., AB Volvo and Investor go up and down completely randomly.
Assuming the 90 days trading horizon AB Volvo is expected to generate 2.36 times less return on investment than Investor. In addition to that, AB Volvo is 1.11 times more volatile than Investor AB ser. It trades about 0.1 of its total potential returns per unit of risk. Investor AB ser is currently generating about 0.27 per unit of volatility. If you would invest 27,094 in Investor AB ser on March 6, 2024 and sell it today you would earn a total of 1,266 from holding Investor AB ser or generate 4.67% return on investment over 90 days.
Over the last 90 days AB Volvo has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, AB Volvo is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Investor AB ser are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Investor may actually be approaching a critical reversion point that can send shares even higher in July 2024.