Correlation Between MWAT and DENT

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

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

Diversification Opportunities for MWAT and DENT

-0.06

Correlation Coefficient

MWAT  DENT

Good diversification

The 3 months correlation between MWAT and DENT is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding MWAT and DENT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DENT and MWAT 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 MWAT are associated (or correlated) with DENT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DENT has no effect on the direction of MWAT i.e., MWAT and DENT go up and down completely randomly.

Pair Corralation between MWAT and DENT

Assuming the 90 days trading horizon MWAT is expected to generate 8.9 times less return on investment than DENT. But when comparing it to its historical volatility, MWAT is 1.66 times less risky than DENT. It trades about 0.01 of its potential returns per unit of risk. DENT is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  0.10  in DENT on February 7, 2024 and sell it today you would earn a total of  0.03  from holding DENT or generate 26.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	69.07%
Values	Daily Returns

MWAT  vs.  DENT

MWAT

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MWAT has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, MWAT is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

DENT

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in DENT are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, DENT exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MWAT and DENT

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

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