Can any of the company-specific risk be diversified away by investing in both Investor and Queens Road 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 Investor and Queens Road into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Investor AB and Queens Road Capital, you can compare the effects of market volatilities on Investor and Queens Road 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 Investor with a short position of Queens Road. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investor and Queens Road.
Diversification Opportunities for Investor and Queens Road
The 3 months correlation between Investor and Queens is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Investor AB and Queens Road Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Queens Road Capital and Investor 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 Investor AB are associated (or correlated) with Queens Road. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Queens Road Capital has no effect on the direction of Investor i.e., Investor and Queens Road go up and down completely randomly.
Assuming the 90 days horizon Investor AB is expected to under-perform the Queens Road. But the pink sheet apears to be less risky and, when comparing its historical volatility, Investor AB is 3.43 times less risky than Queens Road. The pink sheet trades about 0.0 of its potential returns per unit of risk. The Queens Road Capital is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest 63.00 in Queens Road Capital on July 4, 2023 and sell it today you would lose (11.00) from holding Queens Road Capital or give up 17.46% of portfolio value over 90 days.
Over the last 90 days Investor AB has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Investor is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Queens Road Capital are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, Queens Road may actually be approaching a critical reversion point that can send shares even higher in November 2023.
The main advantage of trading using opposite Investor and Queens Road positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investor position performs unexpectedly, Queens Road 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 Queens Road will offset losses from the drop in Queens Road's long position.
The idea behind Investor AB and Queens Road Capital 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
Use Commodity Channel Index to analyze current equity momentum
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