Correlation Between BCD and THC

Can any of the company-specific risk be diversified away by investing in both BCD and THC 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 BCD and THC into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BCD and THC, you can compare the effects of market volatilities on BCD and THC 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 BCD with a short position of THC. Check out your portfolio center. Please also check ongoing floating volatility patterns of BCD and THC.

Diversification Opportunities for BCD and THC

0.32

Correlation Coefficient

BCD  THC

Weak diversification

The 24 months correlation between BCD and THC is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding BCD and THC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on THC and BCD 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 BCD are associated (or correlated) with THC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of THC has no effect on the direction of BCD i.e., BCD and THC go up and down completely randomly.

Pair Corralation between BCD and THC

Assuming the 90 days trading horizon BCD is expected to generate 23.79 times less return on investment than THC. But when comparing it to its historical volatility, BCD is 4.23 times less risky than THC. It trades about 0.02 of its potential returns per unit of risk. THC is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  0.18  in THC on February 10, 2024 and sell it today you would earn a total of  0.14  from holding THC or generate 76.55% return on investment over 90 days.

Time Period	24 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

BCD  vs.  THC

BCD

Risk-Adjusted Performance

1 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BCD are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, BCD may actually be approaching a critical reversion point that can send shares even higher in June 2024.

THC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in THC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, THC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BCD and THC

The main advantage of trading using opposite BCD and THC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BCD position performs unexpectedly, THC 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 THC will offset losses from the drop in THC's long position.

The idea behind BCD and THC 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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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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.