Correlation Between Crane and Smith AO

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

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

Diversification Opportunities for Crane and Smith AO

0.63

Correlation Coefficient

Crane  Smith AO

Poor diversification

The 3 months correlation between Crane and Smith is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Crane Company and Smith AO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith AO and Crane 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 Crane Company are associated (or correlated) with Smith AO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith AO has no effect on the direction of Crane i.e., Crane and Smith AO go up and down completely randomly.

Pair Corralation between Crane and Smith AO

Allowing for the 90-day total investment horizon Crane Company is expected to generate 1.31 times more return on investment than Smith AO. However, Crane is 1.31 times more volatile than Smith AO. It trades about 0.14 of its potential returns per unit of risk. Smith AO is currently generating about -0.09 per unit of risk. If you would invest  13,550  in Crane Company on February 4, 2024 and sell it today you would earn a total of  745.00  from holding Crane Company or generate 5.5% return on investment over 90 days.

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

Crane Company  vs.  Smith AO

Crane Company

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Crane Company are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent basic indicators, Crane reported solid returns over the last few months and may actually be approaching a breakup point.

Smith AO

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smith AO are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal basic indicators, Smith AO may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Crane and Smith AO

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

The idea behind Crane Company and Smith AO 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.