Can any of the company-specific risk be diversified away by investing in both Legend BiotechCorp and Copa Holdings 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 Legend BiotechCorp and Copa Holdings into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Legend BiotechCorp and Copa Holdings SA, you can compare the effects of market volatilities on Legend BiotechCorp and Copa Holdings 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 Legend BiotechCorp with a short position of Copa Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Legend BiotechCorp and Copa Holdings.
Diversification Opportunities for Legend BiotechCorp and Copa Holdings
The 3 months correlation between Legend and Copa is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Legend BiotechCorp and Copa Holdings SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Copa Holdings SA and Legend BiotechCorp 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 Legend BiotechCorp are associated (or correlated) with Copa Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Copa Holdings SA has no effect on the direction of Legend BiotechCorp i.e., Legend BiotechCorp and Copa Holdings go up and down completely randomly.
Pair Corralation between Legend BiotechCorp and Copa Holdings
Given the investment horizon of 90 days Legend BiotechCorp is expected to under-perform the Copa Holdings. In addition to that, Legend BiotechCorp is 1.39 times more volatile than Copa Holdings SA. It trades about -0.13 of its total potential returns per unit of risk. Copa Holdings SA is currently generating about 0.38 per unit of volatility. If you would invest 8,201 in Copa Holdings SA on September 3, 2023 and sell it today you would earn a total of 1,210 from holding Copa Holdings SA or generate 14.75% return on investment over 90 days.
Over the last 90 days Legend BiotechCorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm insiders.
Over the last 90 days Copa Holdings SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Copa Holdings is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
Legend BiotechCorp and Copa Holdings Volatility Contrast
Predicted Return Density
Pair Trading with Legend BiotechCorp and Copa Holdings
The main advantage of trading using opposite Legend BiotechCorp and Copa Holdings positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Legend BiotechCorp position performs unexpectedly, Copa Holdings 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 Copa Holdings will offset losses from the drop in Copa Holdings' long position.
The idea behind Legend BiotechCorp and Copa Holdings SA 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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