Correlation Between MONA and NXT

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

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

Diversification Opportunities for MONA and NXT

0.51

Correlation Coefficient

MONA  NXT

Very weak diversification

The 3 months correlation between MONA and NXT is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding MONA and NXT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXT and MONA 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 MONA are associated (or correlated) with NXT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXT has no effect on the direction of MONA i.e., MONA and NXT go up and down completely randomly.

Pair Corralation between MONA and NXT

Assuming the 90 days trading horizon MONA is expected to generate 14.23 times less return on investment than NXT. But when comparing it to its historical volatility, MONA is 3.61 times less risky than NXT. It trades about 0.01 of its potential returns per unit of risk. NXT is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  0.14  in NXT on September 1, 2024 and sell it today you would lose (0.05) from holding NXT or give up 33.52% of portfolio value over 90 days.

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

MONA  vs.  NXT

MONA

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MONA are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, MONA exhibited solid returns over the last few months and may actually be approaching a breakup point.

NXT

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in NXT are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, NXT exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MONA and NXT

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

The idea behind MONA and NXT 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.