Correlation Between Flow and Gravity

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

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

Diversification Opportunities for Flow and Gravity

0.13

Correlation Coefficient

Flow  Gravity

Average diversification

The 3 months correlation between Flow and Gravity is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Flow and Gravity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gravity and Flow 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 Flow are associated (or correlated) with Gravity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gravity has no effect on the direction of Flow i.e., Flow and Gravity go up and down completely randomly.

Pair Corralation between Flow and Gravity

Assuming the 90 days trading horizon Flow is expected to generate 14.3 times less return on investment than Gravity. But when comparing it to its historical volatility, Flow is 28.4 times less risky than Gravity. It trades about 0.23 of its potential returns per unit of risk. Gravity is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3.27  in Gravity on September 2, 2024 and sell it today you would earn a total of  0.67  from holding Gravity or generate 20.49% return on investment over 90 days.

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

Flow  vs.  Gravity

Flow

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Flow are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Flow exhibited solid returns over the last few months and may actually be approaching a breakup point.

Gravity

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Gravity are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Gravity exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Flow and Gravity

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

The idea behind Flow and Gravity 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.