Correlation Between MONA and ABBC
Can any of the company-specific risk be diversified away by investing in both MONA and ABBC 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 MONA and ABBC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MONA and ABBC, you can compare the effects of market volatilities on MONA and ABBC 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 MONA with a short position of ABBC. Check out your portfolio center. Please also check ongoing floating volatility patterns of MONA and ABBC.
Diversification Opportunities for MONA and ABBC
Very good diversification
The 3 months correlation between MONA and ABBC is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding MONA and ABBC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABBC and MONA 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 MONA are associated (or correlated) with ABBC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABBC has no effect on the direction of MONA i.e., MONA and ABBC go up and down completely randomly.
Pair Corralation between MONA and ABBC
Assuming the 90 days trading horizon MONA is expected to generate 0.63 times more return on investment than ABBC. However, MONA is 1.59 times less risky than ABBC. It trades about -0.01 of its potential returns per unit of risk. ABBC is currently generating about -0.04 per unit of risk. If you would invest 40.00 in MONA on January 20, 2024 and sell it today you would lose (5.00) from holding MONA or give up 12.5% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
MONA vs. ABBC
Performance |
| Timeline |
| MONA |
| ABBC |
MONA and ABBC Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MONA and ABBC
The main advantage of trading using opposite MONA and ABBC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MONA position performs unexpectedly, ABBC 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 ABBC will offset losses from the drop in ABBC's long position.The idea behind MONA and ABBC 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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