Correlation Between Compound and UMA

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

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

Diversification Opportunities for Compound and UMA

0.85

Correlation Coefficient

Compound  UMA

Very poor diversification

The 3 months correlation between Compound and UMA is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Compound and UMA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UMA and Compound 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 Compound are associated (or correlated) with UMA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UMA has no effect on the direction of Compound i.e., Compound and UMA go up and down completely randomly.

Pair Corralation between Compound and UMA

Assuming the 90 days trading horizon Compound is expected to generate 1.28 times more return on investment than UMA. However, Compound is 1.28 times more volatile than UMA. It trades about 0.05 of its potential returns per unit of risk. UMA is currently generating about -0.05 per unit of risk. If you would invest  5,296  in Compound on November 19, 2024 and sell it today you would earn a total of  355.00  from holding Compound or generate 6.7% return on investment over 90 days.

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

Compound  vs.  UMA

Compound

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Compound are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Compound exhibited solid returns over the last few months and may actually be approaching a breakup point.

UMA

Risk-Adjusted Performance

Very Weak

Over the last 90 days UMA 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 basic indicators remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for UMA shareholders.

Pair Trading with Compound and UMA

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

The idea behind Compound and UMA 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.