Correlation Between True USD and REP
Can any of the company-specific risk be diversified away by investing in both True USD and REP 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 True USD and REP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between True USD and REP, you can compare the effects of market volatilities on True USD and REP 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 True USD with a short position of REP. Check out your portfolio center. Please also check ongoing floating volatility patterns of True USD and REP.
Diversification Opportunities for True USD and REP
Poor diversification
The 3 months correlation between True and REP is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding True USD and REP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on REP and True USD 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 True USD are associated (or correlated) with REP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of REP has no effect on the direction of True USD i.e., True USD and REP go up and down completely randomly.
Pair Corralation between True USD and REP
Assuming the 90 days trading horizon True USD is expected to generate 0.1 times more return on investment than REP. However, True USD is 10.0 times less risky than REP. It trades about -0.08 of its potential returns per unit of risk. REP is currently generating about -0.27 per unit of risk. If you would invest 101.00 in True USD on January 19, 2024 and sell it today you would lose (1.00) from holding True USD or give up 0.99% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
True USD vs. REP
Performance |
| Timeline |
| True USD |
| REP |
True USD and REP Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with True USD and REP
The main advantage of trading using opposite True USD and REP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if True USD position performs unexpectedly, REP 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 REP will offset losses from the drop in REP's long position.The idea behind True USD and REP 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.
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