Correlation Between LBA and POCC
Can any of the company-specific risk be diversified away by investing in both LBA and POCC 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 POCC into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LBA and POCC, you can compare the effects of market volatilities on LBA and POCC 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 POCC. Check out your portfolio center. Please also check ongoing floating volatility patterns of LBA and POCC.
Diversification Opportunities for LBA and POCC
Average diversification
The 3 months correlation between LBA and POCC is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding LBA and POCC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on POCC 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 POCC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of POCC has no effect on the direction of LBA i.e., LBA and POCC go up and down completely randomly.
Pair Corralation between LBA and POCC
Assuming the 90 days trading horizon LBA is expected to generate 3.14 times less return on investment than POCC. In addition to that, LBA is 3.58 times more volatile than POCC. It trades about 0.04 of its total potential returns per unit of risk. POCC is currently generating about 0.46 per unit of volatility. If you would invest 0.01 in POCC on September 4, 2024 and sell it today you would earn a total of 0.01 from holding POCC or generate 51.24% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
LBA vs. POCC
Performance |
| Timeline |
| LBA |
| POCC |
LBA and POCC Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with LBA and POCC
The main advantage of trading using opposite LBA and POCC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LBA position performs unexpectedly, POCC 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 POCC will offset losses from the drop in POCC's long position.The idea behind LBA and POCC 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.
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