Correlation Between CMT and Ontology

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

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

Diversification Opportunities for CMT and Ontology

0.83

Correlation Coefficient

CMT  Ontology

Very poor diversification

The 3 months correlation between CMT and Ontology is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding CMT and Ontology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ontology 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 Ontology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ontology has no effect on the direction of CMT i.e., CMT and Ontology go up and down completely randomly.

Pair Corralation between CMT and Ontology

Assuming the 90 days trading horizon CMT is expected to generate 1.25 times less return on investment than Ontology. But when comparing it to its historical volatility, CMT is 1.48 times less risky than Ontology. It trades about 0.25 of its potential returns per unit of risk. Ontology is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  16.00  in Ontology on September 1, 2024 and sell it today you would earn a total of  13.00  from holding Ontology or generate 81.25% return on investment over 90 days.

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

CMT  vs.  Ontology

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.

Ontology

Risk-Adjusted Performance

16 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ontology are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Ontology exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CMT and Ontology

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

The idea behind CMT and Ontology 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.