Correlation Between CAPP and WAB
Can any of the company-specific risk be diversified away by investing in both CAPP and WAB 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 WAB into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CAPP and WAB, you can compare the effects of market volatilities on CAPP and WAB 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 WAB. Check out your portfolio center. Please also check ongoing floating volatility patterns of CAPP and WAB.
Diversification Opportunities for CAPP and WAB
Very weak diversification
The 3 months correlation between CAPP and WAB is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and WAB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WAB 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 WAB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WAB has no effect on the direction of CAPP i.e., CAPP and WAB go up and down completely randomly.
Pair Corralation between CAPP and WAB
Assuming the 90 days trading horizon CAPP is expected to generate 3.27 times more return on investment than WAB. However, CAPP is 3.27 times more volatile than WAB. It trades about 0.08 of its potential returns per unit of risk. WAB is currently generating about 0.1 per unit of risk. If you would invest 0.03 in CAPP on September 4, 2024 and sell it today you would lose (0.02) from holding CAPP or give up 76.68% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 53.18% |
| Values | Daily Returns |
CAPP vs. WAB
Performance |
| Timeline |
| CAPP |
| WAB |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
CAPP and WAB Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CAPP and WAB
The main advantage of trading using opposite CAPP and WAB positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CAPP position performs unexpectedly, WAB 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 WAB will offset losses from the drop in WAB's long position.The idea behind CAPP and WAB 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.
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