Correlation Between PSMB and PSMM

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

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

Diversification Opportunities for PSMB and PSMM

0.0

Correlation Coefficient

PSMB  PSMM

Pay attention - limited upside

The 3 months correlation between PSMB and PSMM is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding PSMB and PSMM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSMM and PSMB 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 PSMB are associated (or correlated) with PSMM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSMM has no effect on the direction of PSMB i.e., PSMB and PSMM go up and down completely randomly.

Pair Corralation between PSMB and PSMM

If you would invest (100.00) in PSMM on December 17, 2024 and sell it today you would earn a total of  100.00  from holding PSMM or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

PSMB  vs.  PSMM

PSMB

Risk-Adjusted Performance

Very Weak

Over the last 90 days PSMB has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong primary indicators, PSMB is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

PSMM

Risk-Adjusted Performance

Very Weak

Over the last 90 days PSMM has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, PSMM is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with PSMB and PSMM

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

The idea behind PSMB and PSMM 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 Global Correlations module to find global opportunities by holding instruments from different markets.