Correlation Between MAPS and KMD
Can any of the company-specific risk be diversified away by investing in both MAPS and KMD 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 MAPS and KMD into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MAPS and KMD, you can compare the effects of market volatilities on MAPS and KMD 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 MAPS with a short position of KMD. Check out your portfolio center. Please also check ongoing floating volatility patterns of MAPS and KMD.
Diversification Opportunities for MAPS and KMD
Significant diversification
The 3 months correlation between MAPS and KMD is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding MAPS and KMD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KMD and MAPS 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 MAPS are associated (or correlated) with KMD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KMD has no effect on the direction of MAPS i.e., MAPS and KMD go up and down completely randomly.
Pair Corralation between MAPS and KMD
Assuming the 90 days trading horizon MAPS is expected to generate 1.96 times more return on investment than KMD. However, MAPS is 1.96 times more volatile than KMD. It trades about -0.01 of its potential returns per unit of risk. KMD is currently generating about -0.29 per unit of risk. If you would invest 1.99 in MAPS on November 1, 2024 and sell it today you would lose (0.24) from holding MAPS or give up 12.06% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
MAPS vs. KMD
Performance |
| Timeline |
| MAPS |
| KMD |
MAPS and KMD Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MAPS and KMD
The main advantage of trading using opposite MAPS and KMD positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MAPS position performs unexpectedly, KMD 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 KMD will offset losses from the drop in KMD's long position.The idea behind MAPS and KMD 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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