Correlation Between Basic Materials and Este Lauder

Can any of the company-specific risk be diversified away by investing in both Basic Materials and Este Lauder 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 Basic Materials and Este Lauder into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Basic Materials and The Este Lauder, you can compare the effects of market volatilities on Basic Materials and Este Lauder 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 Basic Materials with a short position of Este Lauder. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Este Lauder.

Diversification Opportunities for Basic Materials and Este Lauder

-0.01

Correlation Coefficient

Basic Materials  Este Lauder

Good diversification

The 3 months correlation between Basic and Este is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and The Este Lauder in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Este Lauder and Basic Materials 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 Basic Materials are associated (or correlated) with Este Lauder. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Este Lauder has no effect on the direction of Basic Materials i.e., Basic Materials and Este Lauder go up and down completely randomly.

Pair Corralation between Basic Materials and Este Lauder

Assuming the 90 days trading horizon Basic Materials is expected to generate 13.32 times less return on investment than Este Lauder. But when comparing it to its historical volatility, Basic Materials is 2.53 times less risky than Este Lauder. It trades about 0.1 of its potential returns per unit of risk. The Este Lauder is currently generating about 0.53 of returns per unit of risk over similar time horizon. If you would invest  1,533  in The Este Lauder on September 16, 2024 and sell it today you would earn a total of  517.00  from holding The Este Lauder or generate 33.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	90.48%
Values	Daily Returns

Basic Materials  vs.  The Este Lauder

Pair Trading with Basic Materials and Este Lauder

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

The idea behind Basic Materials and The Este Lauder 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.