Correlation Between CLO and CMT
Can any of the company-specific risk be diversified away by investing in both CLO and CMT 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 CMT into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CLO and CMT, you can compare the effects of market volatilities on CLO and CMT 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 CMT. Check out your portfolio center. Please also check ongoing floating volatility patterns of CLO and CMT.
Diversification Opportunities for CLO and CMT
Very good diversification
The 3 months correlation between CLO and CMT is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding CLO and CMT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMT 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 CMT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMT has no effect on the direction of CLO i.e., CLO and CMT go up and down completely randomly.
Pair Corralation between CLO and CMT
Assuming the 90 days trading horizon CLO is expected to generate 49.9 times more return on investment than CMT. However, CLO is 49.9 times more volatile than CMT. It trades about 0.29 of its potential returns per unit of risk. CMT is currently generating about 0.35 per unit of risk. If you would invest 0.07 in CLO on September 4, 2024 and sell it today you would lose (0.07) from holding CLO or give up 91.89% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
CLO vs. CMT
Performance |
| Timeline |
| CLO |
| CMT |
CLO and CMT Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CLO and CMT
The main advantage of trading using opposite CLO and CMT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CLO position performs unexpectedly, CMT 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 CMT will offset losses from the drop in CMT's long position.The idea behind CLO and CMT 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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