Can any of the company-specific risk be diversified away by investing in both OKB and Illuvium 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 OKB and Illuvium into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between OKB and Illuvium, you can compare the effects of market volatilities on OKB and Illuvium 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 OKB with a short position of Illuvium. Check out your portfolio center. Please also check ongoing floating volatility patterns of OKB and Illuvium.
Diversification Opportunities for OKB and Illuvium
The 3 months correlation between OKB and Illuvium is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding OKB and Illuvium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Illuvium and OKB 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 OKB are associated (or correlated) with Illuvium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Illuvium has no effect on the direction of OKB i.e., OKB and Illuvium go up and down completely randomly.
Assuming the 90 days trading horizon OKB is expected to generate 2.83 times less return on investment than Illuvium. But when comparing it to its historical volatility, OKB is 1.79 times less risky than Illuvium. It trades about 0.26 of its potential returns per unit of risk. Illuvium is currently generating about 0.42 of returns per unit of risk over similar time horizon. If you would invest 5,720 in Illuvium on September 3, 2023 and sell it today you would earn a total of 5,254 from holding Illuvium or generate 91.85% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in OKB are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental drivers, OKB exhibited solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Illuvium are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Illuvium exhibited solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite OKB and Illuvium positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if OKB position performs unexpectedly, Illuvium 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 Illuvium will offset losses from the drop in Illuvium's long position.
The idea behind OKB and Illuvium 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.
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