Correlation Between IOC and AE
Can any of the company-specific risk be diversified away by investing in both IOC and AE 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 IOC and AE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between IOC and AE, you can compare the effects of market volatilities on IOC and AE 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 IOC with a short position of AE. Check out your portfolio center. Please also check ongoing floating volatility patterns of IOC and AE.
Diversification Opportunities for IOC and AE
Very weak diversification
The 3 months correlation between IOC and AE is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding IOC and AE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AE and IOC 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 IOC are associated (or correlated) with AE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AE has no effect on the direction of IOC i.e., IOC and AE go up and down completely randomly.
Pair Corralation between IOC and AE
Assuming the 90 days trading horizon IOC is expected to generate 1.2 times less return on investment than AE. But when comparing it to its historical volatility, IOC is 2.04 times less risky than AE. It trades about 0.23 of its potential returns per unit of risk. AE is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest 2.63 in AE on August 28, 2024 and sell it today you would earn a total of 1.00 from holding AE or generate 38.02% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
IOC vs. AE
Performance |
| Timeline |
| IOC |
| AE |
IOC and AE Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with IOC and AE
The main advantage of trading using opposite IOC and AE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IOC position performs unexpectedly, AE 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 AE will offset losses from the drop in AE's long position.The idea behind IOC and AE 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.
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