Can any of the company-specific risk be diversified away by investing in both NikolaCorp and 00108WAF7 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 NikolaCorp and 00108WAF7 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NikolaCorp and AEP TEX INC, you can compare the effects of market volatilities on NikolaCorp and 00108WAF7 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 NikolaCorp with a short position of 00108WAF7. Check out your portfolio center. Please also check ongoing floating volatility patterns of NikolaCorp and 00108WAF7.
Diversification Opportunities for NikolaCorp and 00108WAF7
The 3 months correlation between NikolaCorp and 00108WAF7 is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding NikolaCorp and AEP TEX INC 3.8% 01Oct2047 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AEP TEX INC and NikolaCorp 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 NikolaCorp are associated (or correlated) with 00108WAF7. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AEP TEX INC has no effect on the direction of NikolaCorp i.e., NikolaCorp and 00108WAF7 go up and down completely randomly.
Given the investment horizon of 90 days NikolaCorp is expected to under-perform the 00108WAF7. But the stock apears to be less risky and, when comparing its historical volatility, NikolaCorp is 1.65 times less risky than 00108WAF7. The stock trades about -0.14 of its potential returns per unit of risk. The AEP TEX INC is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest 6,759 in AEP TEX INC on September 3, 2023 and sell it today you would earn a total of 1,462 from holding AEP TEX INC or generate 21.63% return on investment over 90 days.
Over the last 90 days NikolaCorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong essential indicators, NikolaCorp is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in AEP TEX INC are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, 00108WAF7 sustained solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite NikolaCorp and 00108WAF7 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NikolaCorp position performs unexpectedly, 00108WAF7 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 00108WAF7 will offset losses from the drop in 00108WAF7's long position.
The idea behind NikolaCorp and AEP TEX INC 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.
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