Correlation Between KMD and Kava

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

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

Diversification Opportunities for KMD and Kava

0.89

Correlation Coefficient

KMD  Kava

Very poor diversification

The 3 months correlation between KMD and Kava is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding KMD and Kava in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kava and KMD 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 KMD are associated (or correlated) with Kava. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kava has no effect on the direction of KMD i.e., KMD and Kava go up and down completely randomly.

Pair Corralation between KMD and Kava

Assuming the 90 days trading horizon KMD is expected to generate 1.94 times less return on investment than Kava. But when comparing it to its historical volatility, KMD is 1.23 times less risky than Kava. It trades about 0.15 of its potential returns per unit of risk. Kava is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  29.00  in Kava on September 1, 2024 and sell it today you would earn a total of  31.00  from holding Kava or generate 106.9% return on investment over 90 days.

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

KMD  vs.  Kava

KMD

Risk-Adjusted Performance

11 of 100

Good

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

Kava

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Kava are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Kava exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with KMD and Kava

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

The idea behind KMD and Kava 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.