Correlation Between MCO and SOLVE
Can any of the company-specific risk be diversified away by investing in both MCO and SOLVE 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 MCO and SOLVE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MCO and SOLVE, you can compare the effects of market volatilities on MCO and SOLVE 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 MCO with a short position of SOLVE. Check out your portfolio center. Please also check ongoing floating volatility patterns of MCO and SOLVE.
Diversification Opportunities for MCO and SOLVE
Good diversification
The 3 months correlation between MCO and SOLVE is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding MCO and SOLVE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SOLVE and MCO 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 MCO are associated (or correlated) with SOLVE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SOLVE has no effect on the direction of MCO i.e., MCO and SOLVE go up and down completely randomly.
Pair Corralation between MCO and SOLVE
Assuming the 90 days trading horizon MCO is expected to generate 7.94 times more return on investment than SOLVE. However, MCO is 7.94 times more volatile than SOLVE. It trades about 0.06 of its potential returns per unit of risk. SOLVE is currently generating about 0.02 per unit of risk. If you would invest 936.00 in MCO on January 26, 2024 and sell it today you would earn a total of 389.00 from holding MCO or generate 41.56% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
MCO vs. SOLVE
Performance |
| Timeline |
| MCO |
| SOLVE |
MCO and SOLVE Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MCO and SOLVE
The main advantage of trading using opposite MCO and SOLVE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MCO position performs unexpectedly, SOLVE 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 SOLVE will offset losses from the drop in SOLVE's long position.The idea behind MCO and SOLVE 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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