Correlation Between VRA and FIRO
Can any of the company-specific risk be diversified away by investing in both VRA and FIRO 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 VRA and FIRO into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between VRA and FIRO, you can compare the effects of market volatilities on VRA and FIRO 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 VRA with a short position of FIRO. Check out your portfolio center. Please also check ongoing floating volatility patterns of VRA and FIRO.
Diversification Opportunities for VRA and FIRO
Poor diversification
The 3 months correlation between VRA and FIRO is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding VRA and FIRO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FIRO and VRA 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 VRA are associated (or correlated) with FIRO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FIRO has no effect on the direction of VRA i.e., VRA and FIRO go up and down completely randomly.
Pair Corralation between VRA and FIRO
Assuming the 90 days trading horizon VRA is expected to generate 2.63 times more return on investment than FIRO. However, VRA is 2.63 times more volatile than FIRO. It trades about 0.3 of its potential returns per unit of risk. FIRO is currently generating about 0.13 per unit of risk. If you would invest 0.27 in VRA on August 27, 2024 and sell it today you would earn a total of 0.19 from holding VRA or generate 68.89% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
VRA vs. FIRO
Performance |
| Timeline |
| VRA |
| FIRO |
VRA and FIRO Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with VRA and FIRO
The main advantage of trading using opposite VRA and FIRO positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if VRA position performs unexpectedly, FIRO 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 FIRO will offset losses from the drop in FIRO's long position.The idea behind VRA and FIRO 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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