Correlation Between MCO and KMD
Can any of the company-specific risk be diversified away by investing in both MCO and KMD 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 MCO and KMD into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MCO and KMD, you can compare the effects of market volatilities on MCO and KMD 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 MCO with a short position of KMD. Check out your portfolio center. Please also check ongoing floating volatility patterns of MCO and KMD.
Diversification Opportunities for MCO and KMD
Average diversification
The 3 months correlation between MCO and KMD is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding MCO and KMD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KMD and MCO 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 MCO are associated (or correlated) with KMD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KMD has no effect on the direction of MCO i.e., MCO and KMD go up and down completely randomly.
Pair Corralation between MCO and KMD
Assuming the 90 days trading horizon MCO is expected to generate 18.79 times more return on investment than KMD. However, MCO is 18.79 times more volatile than KMD. It trades about 0.21 of its potential returns per unit of risk. KMD is currently generating about 0.11 per unit of risk. If you would invest 85.00 in MCO on January 25, 2024 and sell it today you would earn a total of 1,240 from holding MCO or generate 1458.82% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
MCO vs. KMD
Performance |
| Timeline |
| MCO |
| KMD |
MCO and KMD Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MCO and KMD
The main advantage of trading using opposite MCO and KMD positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MCO position performs unexpectedly, KMD 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 KMD will offset losses from the drop in KMD's long position.The idea behind MCO and KMD 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.
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