Correlation Between CMT and CAPP

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

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

Diversification Opportunities for CMT and CAPP

0.66

Correlation Coefficient

CMT  CAPP

Poor diversification

The 3 months correlation between CMT and CAPP is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding CMT and CAPP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CAPP and CMT 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 CMT are associated (or correlated) with CAPP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CAPP has no effect on the direction of CMT i.e., CMT and CAPP go up and down completely randomly.

Pair Corralation between CMT and CAPP

Assuming the 90 days trading horizon CMT is expected to generate 0.5 times more return on investment than CAPP. However, CMT is 1.98 times less risky than CAPP. It trades about 0.25 of its potential returns per unit of risk. CAPP is currently generating about 0.05 per unit of risk. If you would invest  0.46  in CMT on September 1, 2024 and sell it today you would earn a total of  0.30  from holding CMT or generate 65.36% return on investment over 90 days.

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

CMT  vs.  CAPP

CMT

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CMT are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CMT exhibited solid returns over the last few months and may actually be approaching a breakup point.

CAPP

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CAPP are ranked lower than 3 (%) 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.

Pair Trading with CMT and CAPP

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

The idea behind CMT and CAPP 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.