Correlation Between DENT and CHP

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

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

Diversification Opportunities for DENT and CHP

-0.55

Correlation Coefficient

DENT  CHP

Excellent diversification

The 3 months correlation between DENT and CHP is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding DENT and CHP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CHP and DENT 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 DENT are associated (or correlated) with CHP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CHP has no effect on the direction of DENT i.e., DENT and CHP go up and down completely randomly.

Pair Corralation between DENT and CHP

Assuming the 90 days trading horizon DENT is expected to generate 12.54 times less return on investment than CHP. But when comparing it to its historical volatility, DENT is 7.15 times less risky than CHP. It trades about 0.05 of its potential returns per unit of risk. CHP is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.35  in CHP on August 23, 2024 and sell it today you would lose (0.35) from holding CHP or give up 99.13% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

DENT  vs.  CHP

DENT

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in DENT are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, DENT exhibited solid returns over the last few months and may actually be approaching a breakup point.

CHP

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in CHP are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CHP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DENT and CHP

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

The idea behind DENT and CHP 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.