Correlation Between RSR and SNC

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

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

Diversification Opportunities for RSR and SNC

0.88

Correlation Coefficient

RSR  SNC

Very poor diversification

The 3 months correlation between RSR and SNC is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding RSR and SNC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SNC and RSR 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 RSR are associated (or correlated) with SNC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SNC has no effect on the direction of RSR i.e., RSR and SNC go up and down completely randomly.

Pair Corralation between RSR and SNC

Assuming the 90 days trading horizon RSR is expected to under-perform the SNC. In addition to that, RSR is 1.95 times more volatile than SNC. It trades about -0.29 of its total potential returns per unit of risk. SNC is currently generating about -0.03 per unit of volatility. If you would invest  6.21  in SNC on January 28, 2024 and sell it today you would lose (0.22) from holding SNC or give up 3.54% of portfolio value over 90 days.

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

RSR  vs.  SNC

RSR

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in RSR are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, RSR exhibited solid returns over the last few months and may actually be approaching a breakup point.

SNC

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in SNC are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, SNC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with RSR and SNC

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

The idea behind RSR and SNC 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.