Correlation Between POT and BCD

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

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

Diversification Opportunities for POT and BCD

0.85

Correlation Coefficient

POT  BCD

Very poor diversification

The 3 months correlation between POT and BCD is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding POT and BCD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BCD and POT 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 POT are associated (or correlated) with BCD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BCD has no effect on the direction of POT i.e., POT and BCD go up and down completely randomly.

Pair Corralation between POT and BCD

Assuming the 90 days trading horizon POT is expected to under-perform the BCD. But the crypto coin apears to be less risky and, when comparing its historical volatility, POT is 3.33 times less risky than BCD. The crypto coin trades about -0.01 of its potential returns per unit of risk. The BCD is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  5.79  in BCD on December 28, 2024 and sell it today you would lose (0.38) from holding BCD or give up 6.56% of portfolio value over 90 days.

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

POT  vs.  BCD

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 current stock price tumult, may contribute to shorter-term losses for the shareholders.

BCD

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BCD are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, BCD exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with POT and BCD

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

The idea behind POT and BCD 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.