Correlation Between MTA and DIA
Can any of the company-specific risk be diversified away by investing in both MTA and DIA 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 MTA and DIA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MTA and DIA, you can compare the effects of market volatilities on MTA and DIA 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 MTA with a short position of DIA. Check out your portfolio center. Please also check ongoing floating volatility patterns of MTA and DIA.
Diversification Opportunities for MTA and DIA
Very weak diversification
The 3 months correlation between MTA and DIA is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding MTA and DIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIA and MTA 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 MTA are associated (or correlated) with DIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DIA has no effect on the direction of MTA i.e., MTA and DIA go up and down completely randomly.
Pair Corralation between MTA and DIA
Assuming the 90 days trading horizon MTA is expected to generate 4.22 times more return on investment than DIA. However, MTA is 4.22 times more volatile than DIA. It trades about 0.02 of its potential returns per unit of risk. DIA is currently generating about -0.18 per unit of risk. If you would invest 3.07 in MTA on August 27, 2024 and sell it today you would lose (1.08) from holding MTA or give up 35.18% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
MTA vs. DIA
Performance |
| Timeline |
| MTA |
| DIA |
MTA and DIA Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MTA and DIA
The main advantage of trading using opposite MTA and DIA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MTA position performs unexpectedly, DIA 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 DIA will offset losses from the drop in DIA's long position.The idea behind MTA and DIA 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.
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