Correlation Between GAIA and CLO
Can any of the company-specific risk be diversified away by investing in both GAIA and CLO 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 GAIA and CLO into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between GAIA and CLO, you can compare the effects of market volatilities on GAIA and CLO 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 GAIA with a short position of CLO. Check out your portfolio center. Please also check ongoing floating volatility patterns of GAIA and CLO.
Diversification Opportunities for GAIA and CLO
Significant diversification
The 3 months correlation between GAIA and CLO is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding GAIA and CLO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CLO and GAIA 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 GAIA are associated (or correlated) with CLO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CLO has no effect on the direction of GAIA i.e., GAIA and CLO go up and down completely randomly.
Pair Corralation between GAIA and CLO
Assuming the 90 days trading horizon GAIA is expected to generate 59.58 times less return on investment than CLO. But when comparing it to its historical volatility, GAIA is 15.59 times less risky than CLO. It trades about 0.08 of its potential returns per unit of risk. CLO is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest 0.07 in CLO on August 25, 2024 and sell it today you would lose (0.05) from holding CLO or give up 73.11% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
GAIA vs. CLO
Performance |
| Timeline |
| GAIA |
| CLO |
GAIA and CLO Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GAIA and CLO
The main advantage of trading using opposite GAIA and CLO positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GAIA position performs unexpectedly, CLO 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 CLO will offset losses from the drop in CLO's long position.The idea behind GAIA and CLO 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .
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