Correlation Between THC and AE

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

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

Diversification Opportunities for THC and AE

0.1

Correlation Coefficient

THC  AE

Average diversification

The 3 months correlation between THC and AE is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding THC and AE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AE and THC 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 THC are associated (or correlated) with AE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AE has no effect on the direction of THC i.e., THC and AE go up and down completely randomly.

Pair Corralation between THC and AE

Assuming the 90 days trading horizon THC is expected to under-perform the AE. In addition to that, THC is 2.48 times more volatile than AE. It trades about -0.06 of its total potential returns per unit of risk. AE is currently generating about 0.1 per unit of volatility. If you would invest  3.66  in AE on January 30, 2024 and sell it today you would earn a total of  0.40  from holding AE or generate 10.93% return on investment over 90 days.

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

THC  vs.  AE

THC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in THC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, THC exhibited solid returns over the last few months and may actually be approaching a breakup point.

AE

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in AE are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, AE exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with THC and AE

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

The idea behind THC and AE 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.