Correlation Between PAY and EM
Can any of the company-specific risk be diversified away by investing in both PAY and EM 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 PAY and EM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between PAY and EM, you can compare the effects of market volatilities on PAY and EM 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 PAY with a short position of EM. Check out your portfolio center. Please also check ongoing floating volatility patterns of PAY and EM.
Diversification Opportunities for PAY and EM
Very weak diversification
The 3 months correlation between PAY and EM is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding PAY and EM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EM and PAY 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 PAY are associated (or correlated) with EM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EM has no effect on the direction of PAY i.e., PAY and EM go up and down completely randomly.
Pair Corralation between PAY and EM
Assuming the 90 days trading horizon PAY is expected to under-perform the EM. In addition to that, PAY is 2.13 times more volatile than EM. It trades about -0.14 of its total potential returns per unit of risk. EM is currently generating about -0.13 per unit of volatility. If you would invest 0.08 in EM on February 8, 2024 and sell it today you would lose (0.01) from holding EM or give up 9.04% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Weak |
Accuracy | 100.0% |
Values | Daily Returns |
PAY vs. EM
Performance |
Timeline |
PAY |
EM |
PAY and EM Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with PAY and EM
The main advantage of trading using opposite PAY and EM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PAY position performs unexpectedly, EM 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 EM will offset losses from the drop in EM's long position.The idea behind PAY and EM 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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