Correlation Between Extreme Networks and Lumentum Holdings

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

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

Diversification Opportunities for Extreme Networks and Lumentum Holdings

0.8

Correlation Coefficient

Extreme Networks  Lumentum Holdings

Very poor diversification

The 3 months correlation between Extreme and Lumentum is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Extreme Networks and Lumentum Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumentum Holdings and Extreme Networks 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 Extreme Networks are associated (or correlated) with Lumentum Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumentum Holdings has no effect on the direction of Extreme Networks i.e., Extreme Networks and Lumentum Holdings go up and down completely randomly.

Pair Corralation between Extreme Networks and Lumentum Holdings

Given the investment horizon of 90 days Extreme Networks is expected to generate 6.2 times less return on investment than Lumentum Holdings. But when comparing it to its historical volatility, Extreme Networks is 1.21 times less risky than Lumentum Holdings. It trades about 0.04 of its potential returns per unit of risk. Lumentum Holdings is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  5,761  in Lumentum Holdings on August 30, 2024 and sell it today you would earn a total of  2,616  from holding Lumentum Holdings or generate 45.41% return on investment over 90 days.

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

Extreme Networks  vs.  Lumentum Holdings

Extreme Networks

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Extreme Networks are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, Extreme Networks may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Lumentum Holdings

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lumentum Holdings are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lumentum Holdings exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Extreme Networks and Lumentum Holdings

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

The idea behind Extreme Networks and Lumentum Holdings 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..