Correlation Between CAPP and KEY

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

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

Diversification Opportunities for CAPP and KEY

0.22

Correlation Coefficient

CAPP  KEY

Modest diversification

The 3 months correlation between CAPP and KEY is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and KEY in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KEY 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 KEY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KEY has no effect on the direction of CAPP i.e., CAPP and KEY go up and down completely randomly.

Pair Corralation between CAPP and KEY

Assuming the 90 days trading horizon CAPP is expected to generate 3.65 times more return on investment than KEY. However, CAPP is 3.65 times more volatile than KEY. It trades about -0.02 of its potential returns per unit of risk. KEY is currently generating about -0.16 per unit of risk. If you would invest  0.01  in CAPP on February 7, 2024 and sell it today you would lose  0.00  from holding CAPP or give up 55.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

CAPP  vs.  KEY

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.

KEY

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in KEY are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, KEY exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CAPP and KEY

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

The idea behind CAPP and KEY 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.