Correlation Between SC and MNW
Can any of the company-specific risk be diversified away by investing in both SC and MNW 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 SC and MNW into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SC and MNW, you can compare the effects of market volatilities on SC and MNW 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 SC with a short position of MNW. Check out your portfolio center. Please also check ongoing floating volatility patterns of SC and MNW.
Diversification Opportunities for SC and MNW
Modest diversification
The 3 months correlation between SC and MNW is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding SC and MNW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MNW and SC 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 SC are associated (or correlated) with MNW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MNW has no effect on the direction of SC i.e., SC and MNW go up and down completely randomly.
Pair Corralation between SC and MNW
Assuming the 90 days horizon SC is expected to generate 0.21 times more return on investment than MNW. However, SC is 4.85 times less risky than MNW. It trades about -0.48 of its potential returns per unit of risk. MNW is currently generating about -0.31 per unit of risk. If you would invest 0.61 in SC on November 11, 2024 and sell it today you would lose (0.22) from holding SC or give up 36.11% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
SC vs. MNW
Performance |
| Timeline |
| SC |
| MNW |
SC and MNW Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with SC and MNW
The main advantage of trading using opposite SC and MNW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SC position performs unexpectedly, MNW 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 MNW will offset losses from the drop in MNW's long position.The idea behind SC and MNW 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 Transaction History module to view history of all your transactions and understand their impact on performance.
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