Correlation Between BCD and XDN
Can any of the company-specific risk be diversified away by investing in both BCD and XDN 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 XDN into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BCD and XDN, you can compare the effects of market volatilities on BCD and XDN 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 XDN. Check out your portfolio center. Please also check ongoing floating volatility patterns of BCD and XDN.
Diversification Opportunities for BCD and XDN
Weak diversification
The 3 months correlation between BCD and XDN is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding BCD and XDN in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on XDN 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 XDN. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of XDN has no effect on the direction of BCD i.e., BCD and XDN go up and down completely randomly.
Pair Corralation between BCD and XDN
Assuming the 90 days trading horizon BCD is expected to generate 3.65 times more return on investment than XDN. However, BCD is 3.65 times more volatile than XDN. It trades about 0.18 of its potential returns per unit of risk. XDN is currently generating about 0.42 per unit of risk. If you would invest 5.82 in BCD on August 27, 2024 and sell it today you would earn a total of 2.29 from holding BCD or generate 39.35% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
BCD vs. XDN
Performance |
| Timeline |
| BCD |
| XDN |
BCD and XDN Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BCD and XDN
The main advantage of trading using opposite BCD and XDN positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BCD position performs unexpectedly, XDN 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 XDN will offset losses from the drop in XDN's long position.The idea behind BCD and XDN 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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