Correlation Between KMD and UPP

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

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

Diversification Opportunities for KMD and UPP

0.3

Correlation Coefficient

KMD  UPP

Weak diversification

The 3 months correlation between KMD and UPP is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding KMD and UPP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UPP and KMD 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 KMD are associated (or correlated) with UPP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UPP has no effect on the direction of KMD i.e., KMD and UPP go up and down completely randomly.

Pair Corralation between KMD and UPP

Assuming the 90 days trading horizon KMD is expected to generate 3.49 times less return on investment than UPP. But when comparing it to its historical volatility, KMD is 5.41 times less risky than UPP. It trades about 0.25 of its potential returns per unit of risk. UPP is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  6.66  in UPP on August 30, 2024 and sell it today you would earn a total of  2.19  from holding UPP or generate 32.88% return on investment over 90 days.

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

KMD  vs.  UPP

KMD

Risk-Adjusted Performance

9 of 100

OK

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

UPP

Risk-Adjusted Performance

9 of 100

OK

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

Pair Trading with KMD and UPP

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

The idea behind KMD and UPP 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.