Correlation Between Kava and EM

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

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

Diversification Opportunities for Kava and EM

0.74

Correlation Coefficient

Kava  EM

Poor diversification

The 3 months correlation between Kava and EM is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Kava and EM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EM and Kava 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 Kava are associated (or correlated) with EM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EM has no effect on the direction of Kava i.e., Kava and EM go up and down completely randomly.

Pair Corralation between Kava and EM

Assuming the 90 days trading horizon Kava is expected to under-perform the EM. In addition to that, Kava is 1.93 times more volatile than EM. It trades about -0.24 of its total potential returns per unit of risk. EM is currently generating about -0.11 per unit of volatility. If you would invest  0.08  in EM on February 7, 2024 and sell it today you would lose (0.01) from holding EM or give up 7.59% of portfolio value over 90 days.

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

Kava  vs.  EM

Kava

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Kava are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Kava is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

EM

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in EM are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, EM is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Kava and EM

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

The idea behind Kava and EM 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.