Correlation Between BTM and YOU
Can any of the company-specific risk be diversified away by investing in both BTM and YOU 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 YOU into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BTM and YOU, you can compare the effects of market volatilities on BTM and YOU 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 YOU. Check out your portfolio center. Please also check ongoing floating volatility patterns of BTM and YOU.
Diversification Opportunities for BTM and YOU
Very poor diversification
The 3 months correlation between BTM and YOU is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding BTM and YOU in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on YOU 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 YOU. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of YOU has no effect on the direction of BTM i.e., BTM and YOU go up and down completely randomly.
Pair Corralation between BTM and YOU
Assuming the 90 days trading horizon BTM is expected to generate 0.84 times more return on investment than YOU. However, BTM is 1.19 times less risky than YOU. It trades about 0.02 of its potential returns per unit of risk. YOU is currently generating about 0.0 per unit of risk. If you would invest 1.70 in BTM on January 26, 2024 and sell it today you would lose (0.57) from holding BTM or give up 33.53% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.81% |
| Values | Daily Returns |
BTM vs. YOU
Performance |
| Timeline |
| BTM |
| YOU |
BTM and YOU Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BTM and YOU
The main advantage of trading using opposite BTM and YOU positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BTM position performs unexpectedly, YOU 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 YOU will offset losses from the drop in YOU's long position.The idea behind BTM and YOU 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.
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