Correlation Between Flare and CHP
Can any of the company-specific risk be diversified away by investing in both Flare and CHP 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 Flare and CHP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Flare and CHP, you can compare the effects of market volatilities on Flare and CHP 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 Flare with a short position of CHP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Flare and CHP.
Diversification Opportunities for Flare and CHP
Poor diversification
The 3 months correlation between Flare and CHP is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Flare and CHP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CHP and Flare 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 Flare are associated (or correlated) with CHP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CHP has no effect on the direction of Flare i.e., Flare and CHP go up and down completely randomly.
Pair Corralation between Flare and CHP
Assuming the 90 days trading horizon Flare is expected to generate 4.21 times less return on investment than CHP. But when comparing it to its historical volatility, Flare is 4.69 times less risky than CHP. It trades about 0.04 of its potential returns per unit of risk. CHP is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 1.61 in CHP on November 11, 2024 and sell it today you would lose (1.61) from holding CHP or give up 99.84% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Flare vs. CHP
Performance |
| Timeline |
| Flare |
| CHP |
Flare and CHP Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Flare and CHP
The main advantage of trading using opposite Flare and CHP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Flare position performs unexpectedly, CHP 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 CHP will offset losses from the drop in CHP's long position.The idea behind Flare and CHP 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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