Correlation Between CAPP and DENT
Can any of the company-specific risk be diversified away by investing in both CAPP and DENT 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 CAPP and DENT into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CAPP and DENT, you can compare the effects of market volatilities on CAPP and DENT 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 CAPP with a short position of DENT. Check out your portfolio center. Please also check ongoing floating volatility patterns of CAPP and DENT.
Diversification Opportunities for CAPP and DENT
Poor diversification
The 3 months correlation between CAPP and DENT is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and DENT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DENT and CAPP 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 CAPP are associated (or correlated) with DENT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DENT has no effect on the direction of CAPP i.e., CAPP and DENT go up and down completely randomly.
Pair Corralation between CAPP and DENT
Assuming the 90 days trading horizon CAPP is expected to generate 2.27 times less return on investment than DENT. But when comparing it to its historical volatility, CAPP is 1.15 times less risky than DENT. It trades about 0.37 of its potential returns per unit of risk. DENT is currently generating about 0.74 of returns per unit of risk over similar time horizon. If you would invest 0.08 in DENT on September 4, 2024 and sell it today you would earn a total of 0.10 from holding DENT or generate 118.16% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
CAPP vs. DENT
Performance |
| Timeline |
| CAPP |
| DENT |
CAPP and DENT Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CAPP and DENT
The main advantage of trading using opposite CAPP and DENT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CAPP position performs unexpectedly, DENT 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 DENT will offset losses from the drop in DENT's long position.The idea behind CAPP and DENT 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.
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