Correlation Between NEO and HEDG
Can any of the company-specific risk be diversified away by investing in both NEO and HEDG 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 NEO and HEDG into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NEO and HEDG, you can compare the effects of market volatilities on NEO and HEDG 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 NEO with a short position of HEDG. Check out your portfolio center. Please also check ongoing floating volatility patterns of NEO and HEDG.
Diversification Opportunities for NEO and HEDG
Very weak diversification
The 3 months correlation between NEO and HEDG is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding NEO and HEDG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HEDG and NEO 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 NEO are associated (or correlated) with HEDG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HEDG has no effect on the direction of NEO i.e., NEO and HEDG go up and down completely randomly.
Pair Corralation between NEO and HEDG
Assuming the 90 days trading horizon NEO is expected to generate 5.27 times less return on investment than HEDG. But when comparing it to its historical volatility, NEO is 4.71 times less risky than HEDG. It trades about 0.14 of its potential returns per unit of risk. HEDG is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 3.99 in HEDG on January 25, 2024 and sell it today you would lose (0.22) from holding HEDG or give up 5.51% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
NEO vs. HEDG
Performance |
| Timeline |
| NEO |
| HEDG |
NEO and HEDG Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NEO and HEDG
The main advantage of trading using opposite NEO and HEDG positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NEO position performs unexpectedly, HEDG 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 HEDG will offset losses from the drop in HEDG's long position.The idea behind NEO and HEDG 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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