Correlation Between KM and Booster

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

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

Diversification Opportunities for KM and Booster

0.72

Correlation Coefficient

KM  Booster

Poor diversification

The 3 months correlation between KM and Booster is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding KM Corp. and Booster Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Booster and KM 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 KM Corporation are associated (or correlated) with Booster. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Booster has no effect on the direction of KM i.e., KM and Booster go up and down completely randomly.

Pair Corralation between KM and Booster

Assuming the 90 days trading horizon KM Corporation is expected to under-perform the Booster. In addition to that, KM is 1.83 times more volatile than Booster Co. It trades about -0.06 of its total potential returns per unit of risk. Booster Co is currently generating about -0.08 per unit of volatility. If you would invest  411,000  in Booster Co on September 13, 2024 and sell it today you would lose (23,000) from holding Booster Co or give up 5.6% of portfolio value over 90 days.

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

KM Corp.  vs.  Booster Co

KM Corporation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KM Corporation has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Booster

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Booster Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Booster is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with KM and Booster

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

The idea behind KM Corporation and Booster Co 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..