Correlation Between KMD and Shrapnel

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

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

Diversification Opportunities for KMD and Shrapnel

0.68

Correlation Coefficient

KMD  Shrapnel

Poor diversification

The 3 months correlation between KMD and Shrapnel is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding KMD and Shrapnel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shrapnel and KMD 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 KMD are associated (or correlated) with Shrapnel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shrapnel has no effect on the direction of KMD i.e., KMD and Shrapnel go up and down completely randomly.

Pair Corralation between KMD and Shrapnel

Assuming the 90 days trading horizon KMD is expected to generate 0.52 times more return on investment than Shrapnel. However, KMD is 1.92 times less risky than Shrapnel. It trades about -0.06 of its potential returns per unit of risk. Shrapnel is currently generating about -0.18 per unit of risk. If you would invest  48.00  in KMD on February 7, 2024 and sell it today you would lose (6.00) from holding KMD or give up 12.5% of portfolio value over 90 days.

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

KMD  vs.  Shrapnel

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.

Shrapnel

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shrapnel are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Shrapnel exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with KMD and Shrapnel

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

The idea behind KMD and Shrapnel 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.