Correlation Between State Street and Verizon Communications

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

Diversification Opportunities for State Street and Verizon Communications

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between State and Verizon is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding State Street Aggregate and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and State Street 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 State Street Aggregate are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of State Street i.e., State Street and Verizon Communications go up and down completely randomly.

Pair Corralation between State Street and Verizon Communications

Assuming the 90 days horizon State Street Aggregate is expected to generate 0.31 times more return on investment than Verizon Communications. However, State Street Aggregate is 3.18 times less risky than Verizon Communications. It trades about -0.11 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.07 per unit of risk. If you would invest  10,496  in State Street Aggregate on July 4, 2022 and sell it today you would lose (1,806)  from holding State Street Aggregate or give up 17.21% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy99.79%
ValuesDaily Returns

State Street Aggregate  vs.  Verizon Communications

 Performance (%) 
       Timeline  
State Street Aggregate 
State Performance
0 of 100
Over the last 90 days State Street Aggregate has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, State Street is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

State Price Channel

Verizon Communications 
Verizon Performance
0 of 100
Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in November 2022. The current disturbance may also be a sign of long term up-swing for the company investors.

Verizon Price Channel

State Street and Verizon Communications Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with State Street and Verizon Communications

The main advantage of trading using opposite State Street and Verizon Communications positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if State Street position performs unexpectedly, Verizon Communications 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 Verizon Communications will offset losses from the drop in Verizon Communications' long position.
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The idea behind State Street Aggregate and Verizon Communications 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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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 Price Transformation module to use Price Transformation models to analyze depth of different equity instruments across global markets.

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