Correlation Between Mexico SPBMV and Air Transport

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

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

Diversification Opportunities for Mexico SPBMV and Air Transport

0.09

Correlation Coefficient

Mexico SPBMV Air Transport

Significant diversification

The 3 months correlation between Mexico and Air is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Mexico SPBMV IPC and Air Transport Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air Transport Services and Mexico SPBMV 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 Mexico SPBMV IPC are associated (or correlated) with Air Transport. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air Transport Services has no effect on the direction of Mexico SPBMV i.e., Mexico SPBMV and Air Transport go up and down completely randomly.

Pair Corralation between Mexico SPBMV and Air Transport

Assuming the 90 days trading horizon Mexico SPBMV IPC is expected to generate 0.06 times more return on investment than Air Transport. However, Mexico SPBMV IPC is 16.46 times less risky than Air Transport. It trades about -0.18 of its potential returns per unit of risk. Air Transport Services is currently generating about -0.22 per unit of risk. If you would invest  5,493,739  in Mexico SPBMV IPC on March 6, 2023 and sell it today you would lose (170,468)  from holding Mexico SPBMV IPC or give up 3.1% of portfolio value over 90 days.

Mexico SPBMV IPC  vs.  Air Transport Services

Pair Trading with Mexico SPBMV and Air Transport

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

The idea behind Mexico SPBMV IPC and Air Transport Services 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.