Correlation Between LBA and MTL
Can any of the company-specific risk be diversified away by investing in both LBA and MTL 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 LBA and MTL into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LBA and MTL, you can compare the effects of market volatilities on LBA and MTL 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 LBA with a short position of MTL. Check out your portfolio center. Please also check ongoing floating volatility patterns of LBA and MTL.
Diversification Opportunities for LBA and MTL
Modest diversification
The 3 months correlation between LBA and MTL is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding LBA and MTL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTL and LBA 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 LBA are associated (or correlated) with MTL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTL has no effect on the direction of LBA i.e., LBA and MTL go up and down completely randomly.
Pair Corralation between LBA and MTL
Assuming the 90 days trading horizon LBA is expected to under-perform the MTL. In addition to that, LBA is 1.12 times more volatile than MTL. It trades about -0.22 of its total potential returns per unit of risk. MTL is currently generating about -0.02 per unit of volatility. If you would invest 123.00 in MTL on November 3, 2024 and sell it today you would lose (9.00) from holding MTL or give up 7.32% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
LBA vs. MTL
Performance |
| Timeline |
| LBA |
| MTL |
LBA and MTL Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with LBA and MTL
The main advantage of trading using opposite LBA and MTL positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LBA position performs unexpectedly, MTL 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 MTL will offset losses from the drop in MTL's long position.The idea behind LBA and MTL 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.
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