Correlation Between NEO and Maker
Can any of the company-specific risk be diversified away by investing in both NEO and Maker 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 NEO and Maker into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NEO and Maker, you can compare the effects of market volatilities on NEO and Maker 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 NEO with a short position of Maker. Check out your portfolio center. Please also check ongoing floating volatility patterns of NEO and Maker.
Diversification Opportunities for NEO and Maker
Very weak diversification
The 3 months correlation between NEO and Maker is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding NEO and Maker in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Maker and NEO 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 NEO are associated (or correlated) with Maker. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Maker has no effect on the direction of NEO i.e., NEO and Maker go up and down completely randomly.
Pair Corralation between NEO and Maker
Assuming the 90 days trading horizon NEO is expected to generate 3.57 times less return on investment than Maker. But when comparing it to its historical volatility, NEO is 1.04 times less risky than Maker. It trades about 0.13 of its potential returns per unit of risk. Maker is currently generating about 0.45 of returns per unit of risk over similar time horizon. If you would invest 209,299 in Maker on December 30, 2023 and sell it today you would earn a total of 158,467 from holding Maker or generate 75.71% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Weak |
Accuracy | 100.0% |
Values | Daily Returns |
NEO vs. Maker
Performance |
Timeline |
NEO |
Maker |
NEO and Maker Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with NEO and Maker
The main advantage of trading using opposite NEO and Maker positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NEO position performs unexpectedly, Maker 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 Maker will offset losses from the drop in Maker's long position.The idea behind NEO and Maker 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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