Correlation Between MTH and VTC

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

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

Diversification Opportunities for MTH and VTC

-0.18

Correlation Coefficient

MTH  VTC

Good diversification

The 3 months correlation between MTH and VTC is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding MTH and VTC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VTC and MTH 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 MTH 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 MTH i.e., MTH and VTC go up and down completely randomly.

Pair Corralation between MTH and VTC

Assuming the 90 days trading horizon MTH is expected to generate 2.2 times more return on investment than VTC. However, MTH is 2.2 times more volatile than VTC. It trades about 0.17 of its potential returns per unit of risk. VTC is currently generating about 0.01 per unit of risk. If you would invest  0.13  in MTH on September 2, 2024 and sell it today you would earn a total of  0.30  from holding MTH or generate 226.89% return on investment over 90 days.

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

MTH  vs.  VTC

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.

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 MTH and VTC

The main advantage of trading using opposite MTH and VTC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MTH 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 MTH 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.

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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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.