Correlation Between Diageo PLC and Capital One

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

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

Diversification Opportunities for Diageo PLC and Capital One

0.68

Correlation Coefficient

Diageo PLC  Capital One

Poor diversification

The 3 months correlation between Diageo and Capital is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and Capital One Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital One Financial and Diageo PLC 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 Diageo PLC ADR are associated (or correlated) with Capital One. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital One Financial has no effect on the direction of Diageo PLC i.e., Diageo PLC and Capital One go up and down completely randomly.

Pair Corralation between Diageo PLC and Capital One

Considering the 90-day investment horizon Diageo PLC ADR is expected to under-perform the Capital One. In addition to that, Diageo PLC is 1.29 times more volatile than Capital One Financial. It trades about -0.36 of its total potential returns per unit of risk. Capital One Financial is currently generating about -0.01 per unit of volatility. If you would invest  2,042  in Capital One Financial on August 12, 2024 and sell it today you would lose (6.00) from holding Capital One Financial or give up 0.29% of portfolio value over 90 days.

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

Diageo PLC ADR  vs.  Capital One Financial

Diageo PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Capital One Financial

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Capital One Financial are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite unsteady technical and fundamental indicators, Capital One may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Diageo PLC and Capital One

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

The idea behind Diageo PLC ADR and Capital One Financial 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.