Correlation Between The Merger and The Arbitrage

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

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

Diversification Opportunities for The Merger and The Arbitrage

0.85

Correlation Coefficient

The Merger  The Arbitrage

Very poor diversification

The 3 months correlation between The and The is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding The Merger Fund and The Arbitrage Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The Arbitrage and The Merger 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 The Merger Fund are associated (or correlated) with The Arbitrage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The Arbitrage has no effect on the direction of The Merger i.e., The Merger and The Arbitrage go up and down completely randomly.

Pair Corralation between The Merger and The Arbitrage

Assuming the 90 days horizon The Merger Fund is expected to under-perform the The Arbitrage. But the mutual fund apears to be less risky and, when comparing its historical volatility, The Merger Fund is 1.22 times less risky than The Arbitrage. The mutual fund trades about 0.0 of its potential returns per unit of risk. The The Arbitrage Fund is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,292  in The Arbitrage Fund on August 15, 2024 and sell it today you would earn a total of  6.00  from holding The Arbitrage Fund or generate 0.46% return on investment over 90 days.

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

The Merger Fund  vs.  The Arbitrage Fund

Merger Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Merger Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, The Merger is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

The Arbitrage

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Arbitrage Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, The Arbitrage is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with The Merger and The Arbitrage

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

The idea behind The Merger Fund and The Arbitrage Fund 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.