Correlation Between PSMG and PSMM

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

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

Diversification Opportunities for PSMG and PSMM

0.0

Correlation Coefficient

PSMG  PSMM

Pay attention - limited upside

The 3 months correlation between PSMG and PSMM is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding PSMG and PSMM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSMM and PSMG 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 PSMG 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 PSMG i.e., PSMG and PSMM go up and down completely randomly.

Pair Corralation between PSMG and PSMM

Given the investment horizon of 90 days PSMG is expected to under-perform the PSMM. In addition to that, PSMG is 1.29 times more volatile than PSMM. It trades about -0.04 of its total potential returns per unit of risk. PSMM is currently generating about -0.01 per unit of volatility. If you would invest  1,378  in PSMM on October 25, 2024 and sell it today you would lose (9.00) from holding PSMM or give up 0.65% of portfolio value over 90 days.

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

PSMG  vs.  PSMM

PSMG

Risk-Adjusted Performance

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Very Weak

Over the last 90 days PSMG has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable primary indicators, PSMG is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

PSMM

Risk-Adjusted Performance

0 of 100

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 latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with PSMG and PSMM

The main advantage of trading using opposite PSMG and PSMM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PSMG 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 PSMG 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.