Correlation Between NEO and CVP

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

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

Diversification Opportunities for NEO and CVP

0.8

Correlation Coefficient

NEO  CVP

Very poor diversification

The 3 months correlation between NEO and CVP is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding NEO and CVP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVP and NEO 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 NEO are associated (or correlated) with CVP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVP has no effect on the direction of NEO i.e., NEO and CVP go up and down completely randomly.

Pair Corralation between NEO and CVP

Assuming the 90 days trading horizon NEO is expected to generate 13.46 times less return on investment than CVP. But when comparing it to its historical volatility, NEO is 18.35 times less risky than CVP. It trades about 0.23 of its potential returns per unit of risk. CVP is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  3.11  in CVP on September 2, 2024 and sell it today you would earn a total of  87.89  from holding CVP or generate 2826.05% return on investment over 90 days.

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

NEO  vs.  CVP

NEO

Risk-Adjusted Performance

18 of 100

Solid

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

CVP

Risk-Adjusted Performance

13 of 100

Good

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

Pair Trading with NEO and CVP

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

The idea behind NEO and CVP 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.