Can any of the company-specific risk be diversified away by investing in both Adaptive Medias and Cincinnati Financial 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 Adaptive Medias and Cincinnati Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Adaptive Medias and Cincinnati Financial, you can compare the effects of market volatilities on Adaptive Medias and Cincinnati Financial 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 Adaptive Medias with a short position of Cincinnati Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Adaptive Medias and Cincinnati Financial.
Diversification Opportunities for Adaptive Medias and Cincinnati Financial
The 3 months correlation between Adaptive and Cincinnati is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Adaptive Medias and Cincinnati Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cincinnati Financial and Adaptive Medias 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 Adaptive Medias are associated (or correlated) with Cincinnati Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cincinnati Financial has no effect on the direction of Adaptive Medias i.e., Adaptive Medias and Cincinnati Financial go up and down completely randomly.
Over the last 90 days Adaptive Medias has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Adaptive Medias is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the insiders.
Over the last 90 days Cincinnati Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Cincinnati Financial is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
Adaptive Medias and Cincinnati Financial Volatility Contrast
Predicted Return Density
Pair Trading with Adaptive Medias and Cincinnati Financial
The main advantage of trading using opposite Adaptive Medias and Cincinnati Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Adaptive Medias position performs unexpectedly, Cincinnati Financial 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 Cincinnati Financial will offset losses from the drop in Cincinnati Financial's long position.
The idea behind Adaptive Medias and Cincinnati Financial 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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