Correlation Between NEM and REP

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

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

Diversification Opportunities for NEM and REP

0.95

Correlation Coefficient

NEM  REP

Almost no diversification

The 3 months correlation between NEM and REP is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding NEM and REP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on REP and NEM 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 NEM are associated (or correlated) with REP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of REP has no effect on the direction of NEM i.e., NEM and REP go up and down completely randomly.

Pair Corralation between NEM and REP

Assuming the 90 days trading horizon NEM is expected to generate 4.04 times less return on investment than REP. But when comparing it to its historical volatility, NEM is 2.77 times less risky than REP. It trades about 0.01 of its potential returns per unit of risk. REP is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  918.00  in REP on January 27, 2024 and sell it today you would lose (822.00) from holding REP or give up 89.54% of portfolio value over 90 days.

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

NEM  vs.  REP

NEM

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in NEM are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady primary indicators, NEM exhibited solid returns over the last few months and may actually be approaching a breakup point.

REP

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in REP are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, REP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NEM and REP

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

The idea behind NEM and REP 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.