Correlation Between Stacks and CEL

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

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

Diversification Opportunities for Stacks and CEL

0.6

Correlation Coefficient

Stacks  CEL

Poor diversification

The 3 months correlation between Stacks and CEL is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Stacks and CEL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CEL and Stacks 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 Stacks are associated (or correlated) with CEL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CEL has no effect on the direction of Stacks i.e., Stacks and CEL go up and down completely randomly.

Pair Corralation between Stacks and CEL

Assuming the 90 days trading horizon Stacks is expected to generate 3.2 times less return on investment than CEL. But when comparing it to its historical volatility, Stacks is 3.59 times less risky than CEL. It trades about 0.16 of its potential returns per unit of risk. CEL is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  15.00  in CEL on September 3, 2024 and sell it today you would earn a total of  14.00  from holding CEL or generate 93.33% return on investment over 90 days.

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

Stacks  vs.  CEL

Stacks

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Stacks are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Stacks exhibited solid returns over the last few months and may actually be approaching a breakup point.

CEL

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CEL are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, CEL exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Stacks and CEL

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

The idea behind Stacks and CEL 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.