Correlation Between CMT and SC

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

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

Diversification Opportunities for CMT and SC

-0.25

Correlation Coefficient

CMT  SC

Very good diversification

The 3 months correlation between CMT and SC is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding CMT and SC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SC 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 SC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SC has no effect on the direction of CMT i.e., CMT and SC go up and down completely randomly.

Pair Corralation between CMT and SC

Assuming the 90 days trading horizon CMT is expected to generate 0.53 times more return on investment than SC. However, CMT is 1.89 times less risky than SC. It trades about -0.11 of its potential returns per unit of risk. SC is currently generating about -0.18 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 Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

CMT  vs.  SC

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.

SC

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SC are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, SC may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with CMT and SC

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

The idea behind CMT and SC 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.