Correlation Between DENT and ARK

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

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

Diversification Opportunities for DENT and ARK

0.8

Correlation Coefficient

DENT  ARK

Very poor diversification

The 3 months correlation between DENT and ARK is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding DENT and ARK in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARK and DENT 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 DENT are associated (or correlated) with ARK. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARK has no effect on the direction of DENT i.e., DENT and ARK go up and down completely randomly.

Pair Corralation between DENT and ARK

Assuming the 90 days trading horizon DENT is expected to generate 1.2 times less return on investment than ARK. But when comparing it to its historical volatility, DENT is 1.86 times less risky than ARK. It trades about 0.28 of its potential returns per unit of risk. ARK is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  30.00  in ARK on September 3, 2024 and sell it today you would earn a total of  41.00  from holding ARK or generate 136.67% return on investment over 90 days.

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

DENT  vs.  ARK

DENT

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in DENT are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, DENT exhibited solid returns over the last few months and may actually be approaching a breakup point.

ARK

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in ARK are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward-looking signals, ARK exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DENT and ARK

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

The idea behind DENT and ARK 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.

Check out your portfolio center.

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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.