Correlation Between Big Time and CAPP

Can any of the company-specific risk be diversified away by investing in both Big Time and CAPP 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 Big Time and CAPP into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Big Time and CAPP, you can compare the effects of market volatilities on Big Time and CAPP 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 Big Time with a short position of CAPP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Big Time and CAPP.

Diversification Opportunities for Big Time and CAPP

0.67

Correlation Coefficient

Big Time  CAPP

Poor diversification

The 3 months correlation between Big and CAPP is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Big Time and CAPP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CAPP and Big Time 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 Big Time are associated (or correlated) with CAPP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CAPP has no effect on the direction of Big Time i.e., Big Time and CAPP go up and down completely randomly.

Pair Corralation between Big Time and CAPP

Assuming the 90 days trading horizon Big Time is expected to generate 7.52 times less return on investment than CAPP. But when comparing it to its historical volatility, Big Time is 2.03 times less risky than CAPP. It trades about 0.02 of its potential returns per unit of risk. CAPP is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  0.02  in CAPP on January 29, 2025 and sell it today you would lose (0.01) from holding CAPP or give up 67.22% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Big Time  vs.  CAPP

Big Time

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Big Time are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Big Time exhibited solid returns over the last few months and may actually be approaching a breakup point.

CAPP

Risk-Adjusted Performance

Very Weak

Over the last 90 days CAPP has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, CAPP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Big Time and CAPP

The main advantage of trading using opposite Big Time and CAPP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Big Time position performs unexpectedly, CAPP 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 CAPP will offset losses from the drop in CAPP's long position.

The idea behind Big Time and CAPP 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.

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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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.