Correlation Between BCD and NAV

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

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

Diversification Opportunities for BCD and NAV

-0.1

Correlation Coefficient

BCD  NAV

Good diversification

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

Pair Corralation between BCD and NAV

Assuming the 90 days trading horizon BCD is expected to generate 2.01 times more return on investment than NAV. However, BCD is 2.01 times more volatile than NAV. It trades about 0.07 of its potential returns per unit of risk. NAV is currently generating about -0.12 per unit of risk. If you would invest  6.78  in BCD on August 30, 2024 and sell it today you would earn a total of  1.21  from holding BCD or generate 17.85% return on investment over 90 days.

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

BCD  vs.  NAV

BCD

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BCD are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, BCD exhibited solid returns over the last few months and may actually be approaching a breakup point.

NAV

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NAV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Crypto's basic indicators remain rather sound which may send shares a bit higher in December 2024. The latest tumult may also be a sign of longer-term up-swing for NAV shareholders.

Pair Trading with BCD and NAV

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

The idea behind BCD and NAV 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.