Correlation Between BTM and REP
Can any of the company-specific risk be diversified away by investing in both BTM 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 BTM and REP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BTM and REP, you can compare the effects of market volatilities on BTM 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 BTM with a short position of REP. Check out your portfolio center. Please also check ongoing floating volatility patterns of BTM and REP.
Diversification Opportunities for BTM and REP
Poor diversification
The 3 months correlation between BTM and REP is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding BTM and REP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on REP and BTM 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 BTM 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 BTM i.e., BTM and REP go up and down completely randomly.
Pair Corralation between BTM and REP
Assuming the 90 days trading horizon BTM is expected to generate 2.87 times less return on investment than REP. But when comparing it to its historical volatility, BTM is 1.23 times less risky than REP. It trades about 0.07 of its potential returns per unit of risk. REP is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest 89.00 in REP on February 11, 2024 and sell it today you would earn a total of 75.00 from holding REP or generate 84.27% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BTM vs. REP
Performance |
| Timeline |
| BTM |
| REP |
BTM and REP Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BTM and REP
The main advantage of trading using opposite BTM and REP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BTM 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 BTM 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.
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