Correlation Between CAPP and CMT

Can any of the company-specific risk be diversified away by investing in both CAPP and CMT 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 CAPP and CMT into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between CAPP and CMT, you can compare the effects of market volatilities on CAPP and CMT 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 CAPP with a short position of CMT. Check out your portfolio center. Please also check ongoing floating volatility patterns of CAPP and CMT.

Diversification Opportunities for CAPP and CMT

-0.13

Correlation Coefficient

CAPP  CMT

Good diversification

The 3 months correlation between CAPP and CMT is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and CMT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMT and CAPP 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 CAPP are associated (or correlated) with CMT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMT has no effect on the direction of CAPP i.e., CAPP and CMT go up and down completely randomly.

Pair Corralation between CAPP and CMT

Assuming the 90 days trading horizon CAPP is expected to under-perform the CMT. In addition to that, CAPP is 9.41 times more volatile than CMT. It trades about -0.02 of its total potential returns per unit of risk. CMT is currently generating about -0.11 per unit of volatility. If you would invest  0.55  in CMT on February 7, 2024 and sell it today you would lose (0.04) from holding CMT or give up 7.56% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

CAPP  vs.  CMT

CAPP

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in CAPP are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CAPP exhibited solid returns over the last few months and may actually be approaching a breakup point.

CMT

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CMT are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CMT exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CAPP and CMT

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

The idea behind CAPP and CMT 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.

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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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.