Correlation Between ESS and EM
Can any of the company-specific risk be diversified away by investing in both ESS and EM 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 ESS and EM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ESS and EM, you can compare the effects of market volatilities on ESS and EM 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 ESS with a short position of EM. Check out your portfolio center. Please also check ongoing floating volatility patterns of ESS and EM.
Diversification Opportunities for ESS and EM
Pay attention - limited upside
The 3 months correlation between ESS and EM is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding ESS and EM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EM and ESS 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 ESS are associated (or correlated) with EM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EM has no effect on the direction of ESS i.e., ESS and EM go up and down completely randomly.
Pair Corralation between ESS and EM
Assuming the 90 days trading horizon ESS is expected to generate 0.89 times more return on investment than EM. However, ESS is 1.12 times less risky than EM. It trades about -0.01 of its potential returns per unit of risk. EM is currently generating about -0.02 per unit of risk. If you would invest 0.04 in ESS on August 24, 2024 and sell it today you would lose (0.02) from holding ESS or give up 45.33% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Flat |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
ESS vs. EM
Performance |
| Timeline |
| ESS |
| EM |
ESS and EM Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with ESS and EM
The main advantage of trading using opposite ESS and EM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ESS position performs unexpectedly, EM 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 EM will offset losses from the drop in EM's long position.The idea behind ESS and EM 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.
Other Complementary Tools
| Equity Analysis Research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities | |
| Balance Of Power Check stock momentum by analyzing Balance Of Power indicator and other technical ratios | |
| Bonds Directory Find actively traded corporate debentures issued by US companies | |
| ETFs Find actively traded Exchange Traded Funds (ETF) from around the world | |
| Sign In To Macroaxis Sign in to explore Macroaxis' wealth optimization platform and fintech modules |