Correlation Between Universal and Diageo PLC

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Can any of the company-specific risk be diversified away by investing in both Universal and Diageo PLC 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 Universal and Diageo PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Universal and Diageo PLC ADR, you can compare the effects of market volatilities on Universal and Diageo PLC 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 Universal with a short position of Diageo PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Universal and Diageo PLC.

Diversification Opportunities for Universal and Diageo PLC

-0.72
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between Universal and Diageo is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Universal and Diageo PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diageo PLC ADR and Universal 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 Universal are associated (or correlated) with Diageo PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diageo PLC ADR has no effect on the direction of Universal i.e., Universal and Diageo PLC go up and down completely randomly.

Pair Corralation between Universal and Diageo PLC

Considering the 90-day investment horizon Universal is expected to generate 0.96 times more return on investment than Diageo PLC. However, Universal is 1.04 times less risky than Diageo PLC. It trades about 0.07 of its potential returns per unit of risk. Diageo PLC ADR is currently generating about -0.08 per unit of risk. If you would invest  5,274  in Universal on September 5, 2024 and sell it today you would earn a total of  320.00  from holding Universal or generate 6.07% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Universal  vs.  Diageo PLC ADR

 Performance 
       Timeline  
Universal 

Risk-Adjusted Performance

5 of 100

 
Weak
 
Strong
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in Universal are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Universal may actually be approaching a critical reversion point that can send shares even higher in January 2025.
Diageo PLC ADR 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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 latest weak performance, the Stock's technical and fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Universal and Diageo PLC Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Universal and Diageo PLC

The main advantage of trading using opposite Universal and Diageo PLC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Universal position performs unexpectedly, Diageo PLC 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 Diageo PLC will offset losses from the drop in Diageo PLC's long position.
The idea behind Universal and Diageo PLC ADR 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.

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