Correlation Between 3M and SPDR SP

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Can any of the company-specific risk be diversified away by investing in both 3M and SPDR SP 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 3M and SPDR SP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between 3M Company and SPDR SP Global, you can compare the effects of market volatilities on 3M and SPDR SP 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 3M with a short position of SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and SPDR SP.

Diversification Opportunities for 3M and SPDR SP

0.68
  Correlation Coefficient

Poor diversification

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

Pair Corralation between 3M and SPDR SP

Considering the 90-day investment horizon 3M Company is expected to under-perform the SPDR SP. In addition to that, 3M is 1.47 times more volatile than SPDR SP Global. It trades about -0.06 of its total potential returns per unit of risk. SPDR SP Global is currently generating about 0.03 per unit of volatility. If you would invest  5,103  in SPDR SP Global on September 8, 2022 and sell it today you would earn a total of  307.00  from holding SPDR SP Global or generate 6.02% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

3M Company  vs.  SPDR SP Global

 Performance (%) 
       Timeline  
3M Company 
3M Performance
4 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady primary indicators, 3M may actually be approaching a critical reversion point that can send shares even higher in January 2023.

3M Price Channel

SPDR SP Global 
SPDR SP Performance
0 of 100
Over the last 90 days SPDR SP Global has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable forward indicators, SPDR SP is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

SPDR SP Price Channel

3M and SPDR SP Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with 3M and SPDR SP

The main advantage of trading using opposite 3M and SPDR SP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M position performs unexpectedly, SPDR SP 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 SPDR SP will offset losses from the drop in SPDR SP's long position.
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The idea behind 3M Company and SPDR SP Global 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against SPDR SP as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. SPDR SP's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, SPDR SP's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to SPDR SP Global.
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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.

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