Correlation Between CAPP and GRIN

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

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

Diversification Opportunities for CAPP and GRIN

0.67

Correlation Coefficient

CAPP  GRIN

Poor diversification

The 3 months correlation between CAPP and GRIN is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding CAPP and GRIN in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GRIN and CAPP 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 CAPP are associated (or correlated) with GRIN. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GRIN has no effect on the direction of CAPP i.e., CAPP and GRIN go up and down completely randomly.

Pair Corralation between CAPP and GRIN

Assuming the 90 days trading horizon CAPP is expected to generate 2.22 times less return on investment than GRIN. In addition to that, CAPP is 1.33 times more volatile than GRIN. It trades about 0.05 of its total potential returns per unit of risk. GRIN is currently generating about 0.14 per unit of volatility. If you would invest  3.03  in GRIN on September 1, 2024 and sell it today you would earn a total of  1.43  from holding GRIN or generate 47.19% return on investment over 90 days.

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

CAPP  vs.  GRIN

CAPP

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CAPP are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, CAPP exhibited solid returns over the last few months and may actually be approaching a breakup point.

GRIN

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in GRIN are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, GRIN exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CAPP and GRIN

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

The idea behind CAPP and GRIN 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.