Correlation Between NEO and MCO
Can any of the company-specific risk be diversified away by investing in both NEO and MCO 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 MCO into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NEO and MCO, you can compare the effects of market volatilities on NEO and MCO 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 MCO. Check out your portfolio center. Please also check ongoing floating volatility patterns of NEO and MCO.
Diversification Opportunities for NEO and MCO
Average diversification
The 3 months correlation between NEO and MCO is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding NEO and MCO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MCO 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 MCO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MCO has no effect on the direction of NEO i.e., NEO and MCO go up and down completely randomly.
Pair Corralation between NEO and MCO
Assuming the 90 days trading horizon NEO is expected to generate 22.51 times less return on investment than MCO. But when comparing it to its historical volatility, NEO is 12.61 times less risky than MCO. It trades about 0.04 of its potential returns per unit of risk. MCO is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest 807.00 in MCO on January 27, 2024 and sell it today you would earn a total of 518.00 from holding MCO or generate 64.19% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
NEO vs. MCO
Performance |
| Timeline |
| NEO |
| MCO |
NEO and MCO Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NEO and MCO
The main advantage of trading using opposite NEO and MCO positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NEO position performs unexpectedly, MCO 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 MCO will offset losses from the drop in MCO's long position.The idea behind NEO and MCO 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.
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