Correlation Between Cboe UK and Litigation Capital

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

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

Diversification Opportunities for Cboe UK and Litigation Capital

0.8

Correlation Coefficient

Cboe UK  Litigation Capital

Very poor diversification

The 3 months correlation between Cboe and Litigation is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Cboe UK Consumer and Litigation Capital Management in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Litigation Capital and Cboe UK 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 Cboe UK Consumer are associated (or correlated) with Litigation Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Litigation Capital has no effect on the direction of Cboe UK i.e., Cboe UK and Litigation Capital go up and down completely randomly.

Pair Corralation between Cboe UK and Litigation Capital

Assuming the 90 days trading horizon Cboe UK is expected to generate 1.32 times less return on investment than Litigation Capital. But when comparing it to its historical volatility, Cboe UK Consumer is 2.83 times less risky than Litigation Capital. It trades about 0.28 of its potential returns per unit of risk. Litigation Capital Management is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  9,579  in Litigation Capital Management on September 3, 2024 and sell it today you would earn a total of  2,121  from holding Litigation Capital Management or generate 22.14% return on investment over 90 days.

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

Cboe UK Consumer  vs.  Litigation Capital Management

Pair Trading with Cboe UK and Litigation Capital

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

The idea behind Cboe UK Consumer and Litigation Capital Management 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.