Correlation Between AE and IOC

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

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

Diversification Opportunities for AE and IOC

0.66

Correlation Coefficient

AE  IOC

Poor diversification

The 3 months correlation between AE and IOC is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding AE and IOC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IOC and AE 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 AE are associated (or correlated) with IOC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IOC has no effect on the direction of AE i.e., AE and IOC go up and down completely randomly.

Pair Corralation between AE and IOC

Assuming the 90 days horizon AE is expected to under-perform the IOC. In addition to that, AE is 2.07 times more volatile than IOC. It trades about -0.15 of its total potential returns per unit of risk. IOC is currently generating about -0.03 per unit of volatility. If you would invest  1.22  in IOC on December 26, 2024 and sell it today you would lose (0.09) from holding IOC or give up 7.38% of portfolio value over 90 days.

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

AE  vs.  IOC

AE

Risk-Adjusted Performance

Very Weak

Over the last 90 days AE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Crypto's fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for AE shareholders.

IOC

Risk-Adjusted Performance

Very Weak

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

Pair Trading with AE and IOC

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

The idea behind AE and IOC 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.