Correlation Between ALM Classic and ALM ES

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

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

Diversification Opportunities for ALM Classic and ALM ES

0.81

Correlation Coefficient

ALM Classic  ALM ES

Very poor diversification

The 3 months correlation between ALM and ALM is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding ALM Classic RA and ALM ES Actions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ALM ES Actions and ALM Classic 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 ALM Classic RA are associated (or correlated) with ALM ES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ALM ES Actions has no effect on the direction of ALM Classic i.e., ALM Classic and ALM ES go up and down completely randomly.

Pair Corralation between ALM Classic and ALM ES

Assuming the 90 days trading horizon ALM Classic RA is expected to generate 0.31 times more return on investment than ALM ES. However, ALM Classic RA is 3.19 times less risky than ALM ES. It trades about -0.03 of its potential returns per unit of risk. ALM ES Actions is currently generating about -0.13 per unit of risk. If you would invest  37,992  in ALM Classic RA on December 25, 2024 and sell it today you would lose (198.00) from holding ALM Classic RA or give up 0.52% of portfolio value over 90 days.

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

ALM Classic RA  vs.  ALM ES Actions

ALM Classic RA

Risk-Adjusted Performance

Very Weak

Over the last 90 days ALM Classic RA has generated negative risk-adjusted returns adding no value to fund investors. Despite somewhat strong basic indicators, ALM Classic is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

ALM ES Actions

Risk-Adjusted Performance

Very Weak

Over the last 90 days ALM ES Actions has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest unsteady performance, the Fund's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the fund investors.

Pair Trading with ALM Classic and ALM ES

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

The idea behind ALM Classic RA and ALM ES Actions 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.