Correlation Between CAPP and GAIA

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

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

Diversification Opportunities for CAPP and GAIA

0.41

Correlation Coefficient

CAPP  GAIA

Very weak diversification

The 3 months correlation between CAPP and GAIA is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and GAIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GAIA and CAPP 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 CAPP are associated (or correlated) with GAIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GAIA has no effect on the direction of CAPP i.e., CAPP and GAIA go up and down completely randomly.

Pair Corralation between CAPP and GAIA

Assuming the 90 days trading horizon CAPP is expected to generate 0.73 times more return on investment than GAIA. However, CAPP is 1.37 times less risky than GAIA. It trades about 0.04 of its potential returns per unit of risk. GAIA is currently generating about -0.04 per unit of risk. If you would invest  0.01  in CAPP on August 30, 2024 and sell it today you would earn a total of  0.00  from holding CAPP or generate 0.0% return on investment over 90 days.

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

CAPP  vs.  GAIA

CAPP

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in CAPP are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, CAPP exhibited solid returns over the last few months and may actually be approaching a breakup point.

GAIA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days GAIA 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 December 2024. The latest tumult may also be a sign of longer-term up-swing for GAIA shareholders.

Pair Trading with CAPP and GAIA

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

The idea behind CAPP and GAIA 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.