Correlation Between Optimism and Liquity

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

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

Diversification Opportunities for Optimism and Liquity

-0.39

Correlation Coefficient

Optimism  Liquity

Very good diversification

The 3 months correlation between Optimism and Liquity is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Optimism and Liquity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liquity and Optimism 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 Optimism are associated (or correlated) with Liquity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liquity has no effect on the direction of Optimism i.e., Optimism and Liquity go up and down completely randomly.

Pair Corralation between Optimism and Liquity

Assuming the 90 days horizon Optimism is expected to under-perform the Liquity. But the crypto coin apears to be less risky and, when comparing its historical volatility, Optimism is 1.64 times less risky than Liquity. The crypto coin trades about -0.02 of its potential returns per unit of risk. The Liquity is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  52.00  in Liquity on April 8, 2025 and sell it today you would earn a total of  64.00  from holding Liquity or generate 123.08% return on investment over 90 days.

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

Optimism  vs.  Liquity

Optimism

Risk-Adjusted Performance

Very Weak

Over the last 90 days Optimism has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Crypto's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Optimism shareholders.

Liquity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Liquity are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak fundamental indicators, Liquity exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Optimism and Liquity

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

The idea behind Optimism and Liquity 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.