Correlation Between MCO and MTH

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

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

Diversification Opportunities for MCO and MTH

0.3

Correlation Coefficient

MCO  MTH

Weak diversification

The 3 months correlation between MCO and MTH is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding MCO and MTH in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTH and MCO 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 MCO are associated (or correlated) with MTH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTH has no effect on the direction of MCO i.e., MCO and MTH go up and down completely randomly.

Pair Corralation between MCO and MTH

Assuming the 90 days trading horizon MCO is expected to generate 8.04 times more return on investment than MTH. However, MCO is 8.04 times more volatile than MTH. It trades about 0.12 of its potential returns per unit of risk. MTH is currently generating about 0.18 per unit of risk. If you would invest  85.00  in MCO on September 3, 2024 and sell it today you would earn a total of  1,240  from holding MCO or generate 1458.82% return on investment over 90 days.

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

MCO  vs.  MTH

MCO

Risk-Adjusted Performance

9 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in MCO are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, MCO exhibited solid returns over the last few months and may actually be approaching a breakup point.

MTH

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MTH are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical indicators, MTH exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MCO and MTH

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

The idea behind MCO and MTH 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.