Correlation Between CLO and KMD

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

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

Diversification Opportunities for CLO and KMD

-0.38

Correlation Coefficient

CLO  KMD

Very good diversification

The 3 months correlation between CLO and KMD is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding CLO and KMD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KMD and CLO 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 CLO are associated (or correlated) with KMD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KMD has no effect on the direction of CLO i.e., CLO and KMD go up and down completely randomly.

Pair Corralation between CLO and KMD

Assuming the 90 days trading horizon CLO is expected to generate 39.8 times more return on investment than KMD. However, CLO is 39.8 times more volatile than KMD. It trades about 0.28 of its potential returns per unit of risk. KMD is currently generating about 0.12 per unit of risk. If you would invest  0.07  in CLO on August 30, 2024 and sell it today you would lose (0.07) from holding CLO or give up 91.76% of portfolio value over 90 days.

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

CLO  vs.  KMD

CLO

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CLO are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CLO exhibited solid returns over the last few months and may actually be approaching a breakup point.

KMD

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in KMD are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, KMD exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CLO and KMD

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

The idea behind CLO and KMD 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.