Correlation Between CMT and KMD

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

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

Diversification Opportunities for CMT and KMD

0.76

Correlation Coefficient

CMT  KMD

Poor diversification

The 3 months correlation between CMT and KMD is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding CMT and KMD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KMD and CMT 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 CMT are associated (or correlated) with KMD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KMD has no effect on the direction of CMT i.e., CMT and KMD go up and down completely randomly.

Pair Corralation between CMT and KMD

Assuming the 90 days trading horizon CMT is expected to generate 0.45 times more return on investment than KMD. However, CMT is 2.24 times less risky than KMD. It trades about -0.11 of its potential returns per unit of risk. KMD is currently generating about -0.06 per unit of risk. 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 Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

CMT  vs.  KMD

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.

KMD

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in KMD are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, KMD exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CMT and KMD

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

The idea behind CMT and KMD 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.