Can any of the company-specific risk be diversified away by investing in both Catalystmillburn and Absolute Capital 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 Catalystmillburn and Absolute Capital into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Catalystmillburn Hedge Strategy and Absolute Capital Defender, you can compare the effects of market volatilities on Catalystmillburn and Absolute Capital 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 Catalystmillburn with a short position of Absolute Capital. Check out your portfolio center. Please also check ongoing floating volatility patterns of Catalystmillburn and Absolute Capital.
Diversification Opportunities for Catalystmillburn and Absolute Capital
The 3 months correlation between Catalystmillburn and Absolute is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding CATALYSTMILLBURN HEDGE STRATEG and ABSOLUTE CAPITAL DEFENDER in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Absolute Capital Defender and Catalystmillburn 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 Catalystmillburn Hedge Strategy are associated (or correlated) with Absolute Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Absolute Capital Defender has no effect on the direction of Catalystmillburn i.e., Catalystmillburn and Absolute Capital go up and down completely randomly.
Pair Corralation between Catalystmillburn and Absolute Capital
Assuming the 90 days horizon Catalystmillburn Hedge Strategy is expected to under-perform the Absolute Capital. In addition to that, Catalystmillburn is 1.96 times more volatile than Absolute Capital Defender. It trades about -0.18 of its total potential returns per unit of risk. Absolute Capital Defender is currently generating about 0.53 per unit of volatility. If you would invest 988.00 in Absolute Capital Defender on September 10, 2023 and sell it today you would earn a total of 34.00 from holding Absolute Capital Defender or generate 3.44% return on investment over 90 days.
Over the last 90 days Catalystmillburn Hedge Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Catalystmillburn is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Absolute Capital Defender are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Absolute Capital is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Catalystmillburn and Absolute Capital Volatility Contrast
Predicted Return Density
Pair Trading with Catalystmillburn and Absolute Capital
The main advantage of trading using opposite Catalystmillburn and Absolute Capital positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Catalystmillburn position performs unexpectedly, Absolute Capital 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 Absolute Capital will offset losses from the drop in Absolute Capital's long position.
The idea behind Catalystmillburn Hedge Strategy and Absolute Capital Defender 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.
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