Correlation Between Bank of Nova Scotia and CMC Metals

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

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

Diversification Opportunities for Bank of Nova Scotia and CMC Metals

-0.09

Correlation Coefficient

Bank of Nova Scotia  CMC Metals

Good diversification

The 3 months correlation between Bank and CMC is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Bank of Nova and CMC Metals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMC Metals and Bank of Nova Scotia 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 Bank of Nova are associated (or correlated) with CMC Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMC Metals has no effect on the direction of Bank of Nova Scotia i.e., Bank of Nova Scotia and CMC Metals go up and down completely randomly.

Pair Corralation between Bank of Nova Scotia and CMC Metals

Assuming the 90 days trading horizon Bank of Nova Scotia is expected to generate 11.6 times less return on investment than CMC Metals. But when comparing it to its historical volatility, Bank of Nova is 14.73 times less risky than CMC Metals. It trades about 0.06 of its potential returns per unit of risk. CMC Metals is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  12.00  in CMC Metals on December 4, 2024 and sell it today you would lose (10.00) from holding CMC Metals or give up 83.33% of portfolio value over 90 days.

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

Bank of Nova  vs.  CMC Metals

Bank of Nova Scotia

Risk-Adjusted Performance

Very Weak

Over the last 90 days Bank of Nova has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

CMC Metals

Risk-Adjusted Performance

Modest

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

Pair Trading with Bank of Nova Scotia and CMC Metals

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

The idea behind Bank of Nova and CMC Metals 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.