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Can any of the company-specific risk be diversified away by investing in both XRP and Polkadot 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 XRP and Polkadot into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between XRP and Polkadot, you can compare the effects of market volatilities on XRP and Polkadot 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 XRP with a short position of Polkadot. Check out your portfolio center. Please also check ongoing floating volatility patterns of XRP and Polkadot.

Diversification Opportunities for XRP and Polkadot

 0.99 Correlation Coefficient

No risk reduction

The 3 months correlation between XRP and Polkadot is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding XRP and Polkadot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Polkadot and XRP 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 XRP are associated (or correlated) with Polkadot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Polkadot has no effect on the direction of XRP i.e., XRP and Polkadot go up and down completely randomly.

Pair Corralation between XRP and Polkadot

Assuming the 90 days trading horizon XRP is expected to generate 0.74 times more return on investment than Polkadot. However, XRP is 1.34 times less risky than Polkadot. It trades about -0.21 of its potential returns per unit of risk. Polkadot is currently generating about -0.17 per unit of risk. If you would invest  60.00  in XRP on April 5, 2022 and sell it today you would lose (28.00)  from holding XRP or give up 46.67% of portfolio value over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Very Strong Accuracy 100.0% Values Daily Returns

 Performance (%)
 Timeline
 XRP Correlation Profile
XRP Performance
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Over the last 90 days XRP has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Crypto's basic indicators remain somewhat strong which may send shares a bit higher in August 2022. The current disturbance may also be a sign of long term up-swing for XRP investors.

XRP Price Channel

 Performance Backtest
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Over the last 90 days Polkadot has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Crypto's basic indicators remain somewhat strong which may send shares a bit higher in August 2022. The current disturbance may also be a sign of long term up-swing for Polkadot investors.

 Performance Backtest

 Predicted Return Density
 Returns

The main advantage of trading using opposite XRP and Polkadot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if XRP position performs unexpectedly, Polkadot 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 Polkadot will offset losses from the drop in Polkadot's long position.

XRP

The idea behind XRP and Polkadot 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.