Correlation Between MTL and DATA
Can any of the company-specific risk be diversified away by investing in both MTL and DATA 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 MTL and DATA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MTL and DATA, you can compare the effects of market volatilities on MTL and DATA 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 MTL with a short position of DATA. Check out your portfolio center. Please also check ongoing floating volatility patterns of MTL and DATA.
Diversification Opportunities for MTL and DATA
Poor diversification
The 3 months correlation between MTL and DATA is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding MTL and DATA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DATA and MTL 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 MTL are associated (or correlated) with DATA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DATA has no effect on the direction of MTL i.e., MTL and DATA go up and down completely randomly.
Pair Corralation between MTL and DATA
Assuming the 90 days trading horizon MTL is expected to generate 1.36 times more return on investment than DATA. However, MTL is 1.36 times more volatile than DATA. It trades about 0.54 of its potential returns per unit of risk. DATA is currently generating about 0.54 per unit of risk. If you would invest 86.00 in MTL on September 4, 2024 and sell it today you would earn a total of 75.00 from holding MTL or generate 87.21% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
MTL vs. DATA
Performance |
| Timeline |
| MTL |
| DATA |
MTL and DATA Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with MTL and DATA
The main advantage of trading using opposite MTL and DATA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MTL position performs unexpectedly, DATA 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 DATA will offset losses from the drop in DATA's long position.The idea behind MTL and DATA 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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