Can any of the company-specific risk be diversified away by investing in both Absolute Capital and All Asset 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 Absolute Capital and All Asset into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Absolute Capital Defender and All Asset Fund, you can compare the effects of market volatilities on Absolute Capital and All Asset 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 Absolute Capital with a short position of All Asset. Check out your portfolio center. Please also check ongoing floating volatility patterns of Absolute Capital and All Asset.
Diversification Opportunities for Absolute Capital and All Asset
The 3 months correlation between Absolute and All is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding ABSOLUTE CAPITAL DEFENDER and ALL ASSET FUND in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on All Asset Fund and Absolute Capital 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 Absolute Capital Defender are associated (or correlated) with All Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of All Asset Fund has no effect on the direction of Absolute Capital i.e., Absolute Capital and All Asset go up and down completely randomly.
Pair Corralation between Absolute Capital and All Asset
Assuming the 90 days horizon Absolute Capital is expected to generate 1.2 times less return on investment than All Asset. But when comparing it to its historical volatility, Absolute Capital Defender is 1.6 times less risky than All Asset. It trades about 0.59 of its potential returns per unit of risk. All Asset Fund is currently generating about 0.45 of returns per unit of risk over similar time horizon. If you would invest 1,025 in All Asset Fund on September 1, 2023 and sell it today you would earn a total of 47.00 from holding All Asset Fund or generate 4.59% return on investment over 90 days.
Over the last 90 days Absolute Capital Defender has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Absolute Capital is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Over the last 90 days All Asset Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, All Asset is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Absolute Capital and All Asset Volatility Contrast
Predicted Return Density
Pair Trading with Absolute Capital and All Asset
The main advantage of trading using opposite Absolute Capital and All Asset positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Absolute Capital position performs unexpectedly, All Asset 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 All Asset will offset losses from the drop in All Asset's long position.
The idea behind Absolute Capital Defender and All Asset Fund 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.
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