Correlation Between LTC and SC
Can any of the company-specific risk be diversified away by investing in both LTC 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 LTC and SC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LTC and SC, you can compare the effects of market volatilities on LTC 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 LTC with a short position of SC. Check out your portfolio center. Please also check ongoing floating volatility patterns of LTC and SC.
Diversification Opportunities for LTC and SC
Very weak diversification
The 3 months correlation between LTC and SC is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding LTC and SC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SC and LTC 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 LTC 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 LTC i.e., LTC and SC go up and down completely randomly.
Pair Corralation between LTC and SC
Assuming the 90 days trading horizon LTC is expected to generate 0.9 times more return on investment than SC. However, LTC is 1.11 times less risky than SC. It trades about 0.13 of its potential returns per unit of risk. SC is currently generating about -0.01 per unit of risk. If you would invest 8,711 in LTC on April 25, 2025 and sell it today you would earn a total of 2,538 from holding LTC or generate 29.14% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Weak |
Accuracy | 100.0% |
Values | Daily Returns |
LTC vs. SC
Performance |
Timeline |
LTC |
SC |
LTC and SC Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with LTC and SC
The main advantage of trading using opposite LTC and SC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LTC 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 LTC 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.Check out your portfolio center.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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.
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