Can any of the company-specific risk be diversified away by investing in both Block and Nextnav Acquisition 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 Block and Nextnav Acquisition into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Block Inc and Nextnav Acquisition Corp, you can compare the effects of market volatilities on Block and Nextnav Acquisition 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 Block with a short position of Nextnav Acquisition. Check out your portfolio center. Please also check ongoing floating volatility patterns of Block and Nextnav Acquisition.
Diversification Opportunities for Block and Nextnav Acquisition
The 3 months correlation between Block and Nextnav is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Block Inc and Nextnav Acquisition Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nextnav Acquisition Corp and Block 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 Block Inc are associated (or correlated) with Nextnav Acquisition. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nextnav Acquisition Corp has no effect on the direction of Block i.e., Block and Nextnav Acquisition go up and down completely randomly.
Pair Corralation between Block and Nextnav Acquisition
Allowing for the 90-day total investment horizon Block Inc is expected to generate 0.54 times more return on investment than Nextnav Acquisition. However, Block Inc is 1.85 times less risky than Nextnav Acquisition. It trades about 0.72 of its potential returns per unit of risk. Nextnav Acquisition Corp is currently generating about -0.17 per unit of risk. If you would invest 4,952 in Block Inc on September 7, 2023 and sell it today you would earn a total of 1,848 from holding Block Inc or generate 37.32% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Block Inc are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Block reported solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Nextnav Acquisition Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Nextnav Acquisition is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the insiders.
The main advantage of trading using opposite Block and Nextnav Acquisition positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Block position performs unexpectedly, Nextnav Acquisition 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 Nextnav Acquisition will offset losses from the drop in Nextnav Acquisition's long position.
The idea behind Block Inc and Nextnav Acquisition Corp 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.
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