Can any of the company-specific risk be diversified away by investing in both Ethereum and Litecoin 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 Litecoin into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ethereum and Litecoin, you can compare the effects of market volatilities on Ethereum and Litecoin 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 Litecoin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ethereum and Litecoin.
Diversification Opportunities for Ethereum and Litecoin
The 3 months correlation between Ethereum and Litecoin is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Ethereum and Litecoin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Litecoin 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 Litecoin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Litecoin has no effect on the direction of Ethereum i.e., Ethereum and Litecoin go up and down completely randomly.
Assuming the 90 days trading horizon Ethereum is expected to generate 0.83 times more return on investment than Litecoin. However, Ethereum is 1.21 times less risky than Litecoin. It trades about 0.11 of its potential returns per unit of risk. Litecoin is currently generating about 0.03 per unit of risk. If you would invest 173,925 in Ethereum on March 6, 2024 and sell it today you would earn a total of 203,412 from holding Ethereum or generate 116.95% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Ethereum are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.
Over the last 90 days Litecoin has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Litecoin is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.