Correlation Between CLO and DENT
Can any of the company-specific risk be diversified away by investing in both CLO and DENT 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 CLO and DENT into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CLO and DENT, you can compare the effects of market volatilities on CLO and DENT 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 CLO with a short position of DENT. Check out your portfolio center. Please also check ongoing floating volatility patterns of CLO and DENT.
Diversification Opportunities for CLO and DENT
Very good diversification
The 3 months correlation between CLO and DENT is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding CLO and DENT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DENT and CLO 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 CLO are associated (or correlated) with DENT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DENT has no effect on the direction of CLO i.e., CLO and DENT go up and down completely randomly.
Pair Corralation between CLO and DENT
Assuming the 90 days trading horizon CLO is expected to generate 2.03 times more return on investment than DENT. However, CLO is 2.03 times more volatile than DENT. It trades about -0.05 of its potential returns per unit of risk. DENT is currently generating about -0.16 per unit of risk. If you would invest 0.03 in CLO on January 20, 2024 and sell it today you would lose (0.01) from holding CLO or give up 32.44% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Against |
Strength | Insignificant |
Accuracy | 100.0% |
Values | Daily Returns |
CLO vs. DENT
Performance |
Timeline |
CLO |
DENT |
CLO and DENT Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with CLO and DENT
The main advantage of trading using opposite CLO and DENT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CLO position performs unexpectedly, DENT 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 DENT will offset losses from the drop in DENT's long position.The idea behind CLO and DENT 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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