Correlation Between KMD and Numeraire
Can any of the company-specific risk be diversified away by investing in both KMD and Numeraire 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 KMD and Numeraire into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between KMD and Numeraire, you can compare the effects of market volatilities on KMD and Numeraire 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 KMD with a short position of Numeraire. Check out your portfolio center. Please also check ongoing floating volatility patterns of KMD and Numeraire.
Diversification Opportunities for KMD and Numeraire
Very weak diversification
The 3 months correlation between KMD and Numeraire is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding KMD and Numeraire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Numeraire and KMD 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 KMD are associated (or correlated) with Numeraire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Numeraire has no effect on the direction of KMD i.e., KMD and Numeraire go up and down completely randomly.
Pair Corralation between KMD and Numeraire
Assuming the 90 days trading horizon KMD is expected to generate 1.63 times more return on investment than Numeraire. However, KMD is 1.63 times more volatile than Numeraire. It trades about 0.08 of its potential returns per unit of risk. Numeraire is currently generating about -0.19 per unit of risk. If you would invest 40.00 in KMD on January 25, 2024 and sell it today you would earn a total of 3.00 from holding KMD or generate 7.5% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
KMD vs. Numeraire
Performance |
| Timeline |
| KMD |
| Numeraire |
KMD and Numeraire Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with KMD and Numeraire
The main advantage of trading using opposite KMD and Numeraire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if KMD position performs unexpectedly, Numeraire 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 Numeraire will offset losses from the drop in Numeraire's long position.The idea behind KMD and Numeraire 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.
Other Complementary Tools
| Price Transformation Use Price Transformation models to analyze the depth of different equity instruments across global markets | |
| Companies Directory Evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals | |
| Stocks Directory Find actively traded stocks across global markets | |
| Fundamental Analysis View fundamental data based on most recent published financial statements | |
| Equity Valuation Check real value of public entities based on technical and fundamental data |