Correlation Between LBA and PAY
Can any of the company-specific risk be diversified away by investing in both LBA and PAY 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 PAY into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LBA and PAY, you can compare the effects of market volatilities on LBA and PAY 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 PAY. Check out your portfolio center. Please also check ongoing floating volatility patterns of LBA and PAY.
Diversification Opportunities for LBA and PAY
Very weak diversification
The 3 months correlation between LBA and PAY is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding LBA and PAY in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PAY 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 PAY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PAY has no effect on the direction of LBA i.e., LBA and PAY go up and down completely randomly.
Pair Corralation between LBA and PAY
Assuming the 90 days trading horizon LBA is expected to under-perform the PAY. In addition to that, LBA is 1.24 times more volatile than PAY. It trades about -0.2 of its total potential returns per unit of risk. PAY is currently generating about -0.08 per unit of volatility. If you would invest 0.82 in PAY on November 1, 2024 and sell it today you would lose (0.12) from holding PAY or give up 15.28% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
LBA vs. PAY
Performance |
| Timeline |
| LBA |
| PAY |
LBA and PAY Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with LBA and PAY
The main advantage of trading using opposite LBA and PAY positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LBA position performs unexpectedly, PAY 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 PAY will offset losses from the drop in PAY's long position.The idea behind LBA and PAY 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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