Correlation Between NAV and POT

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

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

Diversification Opportunities for NAV and POT

0.32

Correlation Coefficient

NAV  POT

Weak diversification

The 3 months correlation between NAV and POT is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding NAV and POT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on POT and NAV 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 NAV are associated (or correlated) with POT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of POT has no effect on the direction of NAV i.e., NAV and POT go up and down completely randomly.

Pair Corralation between NAV and POT

Assuming the 90 days trading horizon NAV is expected to generate 3.01 times more return on investment than POT. However, NAV is 3.01 times more volatile than POT. It trades about 0.02 of its potential returns per unit of risk. POT is currently generating about -0.01 per unit of risk. If you would invest  2.62  in NAV on December 28, 2024 and sell it today you would lose (0.18) from holding NAV or give up 6.87% of portfolio value over 90 days.

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

NAV  vs.  POT

NAV

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NAV are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, NAV may actually be approaching a critical reversion point that can send shares even higher in April 2025.

POT

Risk-Adjusted Performance

Very Weak

Over the last 90 days POT has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, POT is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with NAV and POT

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

The idea behind NAV and POT 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.