Correlation Between CLO and ABL
Can any of the company-specific risk be diversified away by investing in both CLO and ABL 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 CLO and ABL into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CLO and ABL, you can compare the effects of market volatilities on CLO and ABL 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 CLO with a short position of ABL. Check out your portfolio center. Please also check ongoing floating volatility patterns of CLO and ABL.
Diversification Opportunities for CLO and ABL
Good diversification
The 3 months correlation between CLO and ABL is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding CLO and ABL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABL and CLO 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 CLO are associated (or correlated) with ABL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABL has no effect on the direction of CLO i.e., CLO and ABL go up and down completely randomly.
Pair Corralation between CLO and ABL
Assuming the 90 days trading horizon CLO is expected to generate 52.0 times more return on investment than ABL. However, CLO is 52.0 times more volatile than ABL. It trades about 0.21 of its potential returns per unit of risk. ABL is currently generating about 0.13 per unit of risk. If you would invest 0.42 in CLO on August 25, 2024 and sell it today you would lose (0.40) from holding CLO or give up 95.31% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 55.33% |
| Values | Daily Returns |
CLO vs. ABL
Performance |
| Timeline |
| CLO |
| ABL |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
CLO and ABL Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CLO and ABL
The main advantage of trading using opposite CLO and ABL positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CLO position performs unexpectedly, ABL 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 ABL will offset losses from the drop in ABL's long position.The idea behind CLO and ABL 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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