Correlation Between Amazon and EBay
Can any of the company-specific risk be diversified away by investing in both Amazon and EBay 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 Amazon and EBay into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Amazon Inc and eBay Inc, you can compare the effects of market volatilities on Amazon and EBay 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 Amazon with a short position of EBay. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amazon and EBay.
Diversification Opportunities for Amazon and EBay
Very poor diversification
The 3 months correlation between Amazon and EBay is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and eBay Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on eBay Inc and Amazon 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 Amazon Inc are associated (or correlated) with EBay. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of eBay Inc has no effect on the direction of Amazon i.e., Amazon and EBay go up and down completely randomly.
Pair Corralation between Amazon and EBay
Given the investment horizon of 90 days Amazon Inc is expected to generate 0.99 times more return on investment than EBay. However, Amazon Inc is 1.01 times less risky than EBay. It trades about 0.18 of its potential returns per unit of risk. eBay Inc is currently generating about 0.13 per unit of risk. If you would invest 12,656 in Amazon Inc on January 19, 2024 and sell it today you would earn a total of 5,547 from holding Amazon Inc or generate 43.83% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Amazon Inc vs. eBay Inc
Performance |
| Timeline |
| Amazon Inc |
| eBay Inc |
Amazon and EBay Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Amazon and EBay
The main advantage of trading using opposite Amazon and EBay positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Amazon position performs unexpectedly, EBay 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 EBay will offset losses from the drop in EBay's long position.The idea behind Amazon Inc and eBay Inc 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.Check out your portfolio center.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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.
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