Correlation Between LG Chem and LG Chemicals

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

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

Diversification Opportunities for LG Chem and LG Chemicals

0.9

Correlation Coefficient

LG Chem  LG Chemicals

Almost no diversification

The 3 months correlation between 051915 and 051910 is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding LG Chem and LG Chemicals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LG Chemicals and LG Chem 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 LG Chem are associated (or correlated) with LG Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LG Chemicals has no effect on the direction of LG Chem i.e., LG Chem and LG Chemicals go up and down completely randomly.

Pair Corralation between LG Chem and LG Chemicals

Assuming the 90 days trading horizon LG Chem is expected to under-perform the LG Chemicals. But the stock apears to be less risky and, when comparing its historical volatility, LG Chem is 1.01 times less risky than LG Chemicals. The stock trades about -0.15 of its potential returns per unit of risk. The LG Chemicals is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  43,050,000  in LG Chemicals on January 31, 2024 and sell it today you would lose (2,800,000) from holding LG Chemicals or give up 6.5% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

LG Chem  vs.  LG Chemicals

LG Chem

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LG Chem has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, LG Chem is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

LG Chemicals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LG Chemicals has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with LG Chem and LG Chemicals

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

The idea behind LG Chem and LG Chemicals 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.