Correlation Between BTM and MONA
Can any of the company-specific risk be diversified away by investing in both BTM and MONA 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 BTM and MONA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BTM and MONA, you can compare the effects of market volatilities on BTM and MONA 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 BTM with a short position of MONA. Check out your portfolio center. Please also check ongoing floating volatility patterns of BTM and MONA.
Diversification Opportunities for BTM and MONA
Very poor diversification
The 3 months correlation between BTM and MONA is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding BTM and MONA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MONA and BTM 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 BTM are associated (or correlated) with MONA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MONA has no effect on the direction of BTM i.e., BTM and MONA go up and down completely randomly.
Pair Corralation between BTM and MONA
Assuming the 90 days trading horizon BTM is expected to generate 1.14 times more return on investment than MONA. However, BTM is 1.14 times more volatile than MONA. It trades about -0.07 of its potential returns per unit of risk. MONA is currently generating about -0.2 per unit of risk. If you would invest 1.24 in BTM on January 26, 2024 and sell it today you would lose (0.11) from holding BTM or give up 8.87% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
BTM vs. MONA
Performance |
| Timeline |
| BTM |
| MONA |
BTM and MONA Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BTM and MONA
The main advantage of trading using opposite BTM and MONA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BTM position performs unexpectedly, MONA 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 MONA will offset losses from the drop in MONA's long position.The idea behind BTM and MONA 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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