Correlation Between MCO and VTC

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

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

Diversification Opportunities for MCO and VTC

0.03

Correlation Coefficient

MCO  VTC

Significant diversification

The 3 months correlation between MCO and VTC is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding MCO and VTC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VTC 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 VTC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VTC has no effect on the direction of MCO i.e., MCO and VTC go up and down completely randomly.

Pair Corralation between MCO and VTC

Assuming the 90 days trading horizon MCO is expected to generate 64.09 times less return on investment than VTC. But when comparing it to its historical volatility, MCO is 15.02 times less risky than VTC. It trades about 0.0 of its potential returns per unit of risk. VTC is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  6.04  in VTC on September 2, 2024 and sell it today you would lose (0.64) from holding VTC or give up 10.6% of portfolio value over 90 days.

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

MCO  vs.  VTC

MCO

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days MCO has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, MCO is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

VTC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days VTC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, VTC is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with MCO and VTC

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

The idea behind MCO and VTC 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.