Correlation Between NEM and BTS
Can any of the company-specific risk be diversified away by investing in both NEM and BTS 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 NEM and BTS into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NEM and BTS, you can compare the effects of market volatilities on NEM and BTS 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 NEM with a short position of BTS. Check out your portfolio center. Please also check ongoing floating volatility patterns of NEM and BTS.
Diversification Opportunities for NEM and BTS
Poor diversification
The 3 months correlation between NEM and BTS is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding NEM and BTS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BTS and NEM 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 NEM are associated (or correlated) with BTS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BTS has no effect on the direction of NEM i.e., NEM and BTS go up and down completely randomly.
Pair Corralation between NEM and BTS
Assuming the 90 days trading horizon NEM is expected to under-perform the BTS. But the crypto coin apears to be less risky and, when comparing its historical volatility, NEM is 1.43 times less risky than BTS. The crypto coin trades about -0.19 of its potential returns per unit of risk. The BTS is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest 0.39 in BTS on January 20, 2024 and sell it today you would lose (0.09) from holding BTS or give up 22.49% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
NEM vs. BTS
Performance |
| Timeline |
| NEM |
| BTS |
NEM and BTS Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NEM and BTS
The main advantage of trading using opposite NEM and BTS positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NEM position performs unexpectedly, BTS 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 BTS will offset losses from the drop in BTS's long position.The idea behind NEM and BTS 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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