Correlation Between ADX and Chroma

Can any of the company-specific risk be diversified away by investing in both ADX and Chroma 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 ADX and Chroma into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ADX and Chroma, you can compare the effects of market volatilities on ADX and Chroma 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 ADX with a short position of Chroma. Check out your portfolio center. Please also check ongoing floating volatility patterns of ADX and Chroma.

Diversification Opportunities for ADX and Chroma

0.65

Correlation Coefficient

ADX  Chroma

Poor diversification

The 3 months correlation between ADX and Chroma is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding ADX and Chroma in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chroma and ADX 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 ADX are associated (or correlated) with Chroma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chroma has no effect on the direction of ADX i.e., ADX and Chroma go up and down completely randomly.

Pair Corralation between ADX and Chroma

Assuming the 90 days trading horizon ADX is expected to generate 1.22 times less return on investment than Chroma. But when comparing it to its historical volatility, ADX is 1.19 times less risky than Chroma. It trades about 0.07 of its potential returns per unit of risk. Chroma is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  27.00  in Chroma on January 26, 2024 and sell it today you would earn a total of  5.00  from holding Chroma or generate 18.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

ADX  vs.  Chroma

ADX

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ADX are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, ADX exhibited solid returns over the last few months and may actually be approaching a breakup point.

Chroma

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Chroma are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Chroma exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with ADX and Chroma

The main advantage of trading using opposite ADX and Chroma positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ADX position performs unexpectedly, Chroma 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 Chroma will offset losses from the drop in Chroma's long position.

The idea behind ADX and Chroma 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.