Can any of the company-specific risk be diversified away by investing in both Ethereum and Dogecoin 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 Ethereum and Dogecoin into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ethereum and Dogecoin, you can compare the effects of market volatilities on Ethereum and Dogecoin 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 Ethereum with a short position of Dogecoin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ethereum and Dogecoin.
Diversification Opportunities for Ethereum and Dogecoin
The 3 months correlation between Ethereum and Dogecoin is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Ethereum and Dogecoin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dogecoin and Ethereum 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 Ethereum are associated (or correlated) with Dogecoin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dogecoin has no effect on the direction of Ethereum i.e., Ethereum and Dogecoin go up and down completely randomly.
Assuming the 90 days trading horizon Ethereum is expected to generate 4.49 times less return on investment than Dogecoin. But when comparing it to its historical volatility, Ethereum is 1.57 times less risky than Dogecoin. It trades about 0.01 of its potential returns per unit of risk. Dogecoin is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 16.00 in Dogecoin on March 6, 2024 and sell it today you would earn a total of 0.00 from holding Dogecoin or generate 0.0% return on investment over 90 days.
Over the last 90 days Ethereum has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, Ethereum is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Dogecoin are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Dogecoin exhibited solid returns over the last few months and may actually be approaching a breakup point.