Correlation Between REDLANG and CAPP

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

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

Diversification Opportunities for REDLANG and CAPP

-0.12

Correlation Coefficient

REDLANG  CAPP

Good diversification

The 3 months correlation between REDLANG and CAPP is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding REDLANG and CAPP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CAPP and REDLANG 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 REDLANG are associated (or correlated) with CAPP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CAPP has no effect on the direction of REDLANG i.e., REDLANG and CAPP go up and down completely randomly.

Pair Corralation between REDLANG and CAPP

Assuming the 90 days trading horizon REDLANG is expected to generate 4.83 times more return on investment than CAPP. However, REDLANG is 4.83 times more volatile than CAPP. It trades about 0.01 of its potential returns per unit of risk. CAPP is currently generating about -0.01 per unit of risk. If you would invest  0.11  in REDLANG on November 27, 2024 and sell it today you would lose (0.03) from holding REDLANG or give up 30.28% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

REDLANG  vs.  CAPP

REDLANG

Risk-Adjusted Performance

Very Weak

Over the last 90 days REDLANG has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly unsteady essential indicators, REDLANG may actually be approaching a critical reversion point that can send shares even higher in March 2025.

CAPP

Risk-Adjusted Performance

Very Weak

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

Pair Trading with REDLANG and CAPP

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

The idea behind REDLANG and CAPP 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.