Correlation Between BCD and HC
Can any of the company-specific risk be diversified away by investing in both BCD and HC 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 BCD and HC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BCD and HC, you can compare the effects of market volatilities on BCD and HC 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 BCD with a short position of HC. Check out your portfolio center. Please also check ongoing floating volatility patterns of BCD and HC.
Diversification Opportunities for BCD and HC
Average diversification
The 3 months correlation between BCD and HC is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding BCD and HC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HC and BCD 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 BCD are associated (or correlated) with HC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HC has no effect on the direction of BCD i.e., BCD and HC go up and down completely randomly.
Pair Corralation between BCD and HC
Assuming the 90 days trading horizon BCD is expected to generate 2.62 times more return on investment than HC. However, BCD is 2.62 times more volatile than HC. It trades about 0.15 of its potential returns per unit of risk. HC is currently generating about 0.0 per unit of risk. If you would invest 5.86 in BCD on August 25, 2024 and sell it today you would earn a total of 1.66 from holding BCD or generate 28.33% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BCD vs. HC
Performance |
| Timeline |
| BCD |
| HC |
BCD and HC Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BCD and HC
The main advantage of trading using opposite BCD and HC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BCD position performs unexpectedly, HC 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 HC will offset losses from the drop in HC's long position.The idea behind BCD and HC 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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