Correlation Between DENT and KMD

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

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

Diversification Opportunities for DENT and KMD

0.51

Correlation Coefficient

DENT  KMD

Very weak diversification

The 3 months correlation between DENT and KMD is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding DENT and KMD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KMD 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 KMD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KMD has no effect on the direction of DENT i.e., DENT and KMD go up and down completely randomly.

Pair Corralation between DENT and KMD

Assuming the 90 days trading horizon DENT is expected to generate 1.03 times more return on investment than KMD. However, DENT is 1.03 times more volatile than KMD. It trades about 0.07 of its potential returns per unit of risk. KMD is currently generating about 0.0 per unit of risk. If you would invest  0.09  in DENT on August 23, 2024 and sell it today you would earn a total of  0.01  from holding DENT or generate 14.02% return on investment over 90 days.

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

DENT  vs.  KMD

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.

KMD

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with DENT and KMD

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

The idea behind DENT and KMD 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.