Correlation Between NMC and Waves

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

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

Diversification Opportunities for NMC and Waves

0.9

Correlation Coefficient

NMC  Waves

Almost no diversification

The 3 months correlation between NMC and Waves is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding NMC and Waves in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Waves and NMC 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 NMC are associated (or correlated) with Waves. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Waves has no effect on the direction of NMC i.e., NMC and Waves go up and down completely randomly.

Pair Corralation between NMC and Waves

Assuming the 90 days trading horizon NMC is expected to generate 1.16 times less return on investment than Waves. But when comparing it to its historical volatility, NMC is 1.19 times less risky than Waves. It trades about 0.27 of its potential returns per unit of risk. Waves is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  100.00  in Waves on September 2, 2024 and sell it today you would earn a total of  124.00  from holding Waves or generate 124.0% return on investment over 90 days.

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

NMC  vs.  Waves

NMC

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in NMC are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, NMC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Waves

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Waves are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Waves exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NMC and Waves

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

The idea behind NMC and Waves 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.