Correlation Between EMC2 and XWC
Can any of the company-specific risk be diversified away by investing in both EMC2 and XWC 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 EMC2 and XWC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between EMC2 and XWC, you can compare the effects of market volatilities on EMC2 and XWC 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 EMC2 with a short position of XWC. Check out your portfolio center. Please also check ongoing floating volatility patterns of EMC2 and XWC.
Diversification Opportunities for EMC2 and XWC
No risk reduction
The 3 months correlation between EMC2 and XWC is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding EMC2 and XWC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on XWC and EMC2 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 EMC2 are associated (or correlated) with XWC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of XWC has no effect on the direction of EMC2 i.e., EMC2 and XWC go up and down completely randomly.
Pair Corralation between EMC2 and XWC
Assuming the 90 days trading horizon EMC2 is expected to generate 1.0 times less return on investment than XWC. But when comparing it to its historical volatility, EMC2 is 1.0 times less risky than XWC. It trades about 0.25 of its potential returns per unit of risk. XWC is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest 2.01 in XWC on September 2, 2024 and sell it today you would earn a total of 1.37 from holding XWC or generate 68.16% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
EMC2 vs. XWC
Performance |
| Timeline |
| EMC2 |
| XWC |
EMC2 and XWC Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with EMC2 and XWC
The main advantage of trading using opposite EMC2 and XWC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if EMC2 position performs unexpectedly, XWC 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 XWC will offset losses from the drop in XWC's long position.The idea behind EMC2 and XWC 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.
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