Correlation Between Optimism and Compound

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

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

Diversification Opportunities for Optimism and Compound

0.8

Correlation Coefficient

Optimism  Compound

Very poor diversification

The 3 months correlation between Optimism and Compound is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Optimism and Compound in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Compound and Optimism 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 Optimism are associated (or correlated) with Compound. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Compound has no effect on the direction of Optimism i.e., Optimism and Compound go up and down completely randomly.

Pair Corralation between Optimism and Compound

Assuming the 90 days horizon Optimism is expected to generate 6.77 times less return on investment than Compound. But when comparing it to its historical volatility, Optimism is 1.19 times less risky than Compound. It trades about 0.03 of its potential returns per unit of risk. Compound is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  4,395  in Compound on October 23, 2024 and sell it today you would earn a total of  3,588  from holding Compound or generate 81.64% return on investment over 90 days.

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

Optimism  vs.  Compound

Optimism

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Optimism are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Optimism may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Compound

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Compound are ranked lower than 11 (%) 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.

Pair Trading with Optimism and Compound

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

The idea behind Optimism and Compound 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.