Can any of the company-specific risk be diversified away by investing in both Schwab US and Aptos 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 Schwab US and Aptos into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Schwab US Dividend and Aptos, you can compare the effects of market volatilities on Schwab US and Aptos 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 Schwab US with a short position of Aptos. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab US and Aptos.
Diversification Opportunities for Schwab US and Aptos
The 3 months correlation between Schwab and Aptos is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Schwab US Dividend and Aptos in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aptos and Schwab US 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 Schwab US Dividend are associated (or correlated) with Aptos. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aptos has no effect on the direction of Schwab US i.e., Schwab US and Aptos go up and down completely randomly.
Given the investment horizon of 90 days Schwab US is expected to generate 9.31 times less return on investment than Aptos. But when comparing it to its historical volatility, Schwab US Dividend is 5.09 times less risky than Aptos. It trades about 0.09 of its potential returns per unit of risk. Aptos is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 534.00 in Aptos on September 2, 2023 and sell it today you would earn a total of 161.00 from holding Aptos or generate 30.15% return on investment over 90 days.
Over the last 90 days Schwab US Dividend has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, Schwab US is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Aptos are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Aptos exhibited solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Schwab US and Aptos positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Schwab US position performs unexpectedly, Aptos 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 Aptos will offset losses from the drop in Aptos' long position.
The idea behind Schwab US Dividend and Aptos 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.
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