Correlation Between CLO and MTL

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

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

Diversification Opportunities for CLO and MTL

-0.42

Correlation Coefficient

CLO  MTL

Very good diversification

The 3 months correlation between CLO and MTL is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding CLO and MTL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTL 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 MTL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTL has no effect on the direction of CLO i.e., CLO and MTL go up and down completely randomly.

Pair Corralation between CLO and MTL

Assuming the 90 days trading horizon CLO is expected to generate 31.0 times more return on investment than MTL. However, CLO is 31.0 times more volatile than MTL. It trades about 0.3 of its potential returns per unit of risk. MTL is currently generating about 0.35 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	Very Weak
Accuracy	100.0%
Values	Daily Returns

CLO  vs.  MTL

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.

MTL

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MTL are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, MTL exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CLO and MTL

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

The idea behind CLO and MTL 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.