Correlation Between DATA and Wormhole

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

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

Diversification Opportunities for DATA and Wormhole

0.2

Correlation Coefficient

DATA  Wormhole

Modest diversification

The 3 months correlation between DATA and Wormhole is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding DATA and Wormhole in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wormhole and DATA 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 DATA are associated (or correlated) with Wormhole. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wormhole has no effect on the direction of DATA i.e., DATA and Wormhole go up and down completely randomly.

Pair Corralation between DATA and Wormhole

Assuming the 90 days trading horizon DATA is expected to generate 1.28 times less return on investment than Wormhole. But when comparing it to its historical volatility, DATA is 1.15 times less risky than Wormhole. It trades about 0.11 of its potential returns per unit of risk. Wormhole is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  21.00  in Wormhole on August 30, 2024 and sell it today you would earn a total of  9.00  from holding Wormhole or generate 42.86% return on investment over 90 days.

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

DATA  vs.  Wormhole

DATA

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in DATA are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, DATA exhibited solid returns over the last few months and may actually be approaching a breakup point.

Wormhole

Risk-Adjusted Performance

9 of 100

OK

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

Pair Trading with DATA and Wormhole

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

The idea behind DATA and Wormhole 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.