Correlation Between Burford Capital and ATX

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Can any of the company-specific risk be diversified away by investing in both Burford Capital and ATX 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 Burford Capital and ATX into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Burford Capital and ATX, you can compare the effects of market volatilities on Burford Capital and ATX 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 Burford Capital with a short position of ATX. Check out your portfolio center. Please also check ongoing floating volatility patterns of Burford Capital and ATX.

Diversification Opportunities for Burford Capital and ATX

0.7
  Correlation Coefficient

Poor diversification

The 3 months correlation between Burford and ATX is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Burford Capital and ATX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ATX and Burford Capital 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 Burford Capital are associated (or correlated) with ATX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ATX has no effect on the direction of Burford Capital i.e., Burford Capital and ATX go up and down completely randomly.
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Pair Corralation between Burford Capital and ATX

Considering the 90-day investment horizon Burford Capital is expected to generate 1.74 times more return on investment than ATX. However, Burford Capital is 1.74 times more volatile than ATX. It trades about 0.25 of its potential returns per unit of risk. ATX is currently generating about 0.34 per unit of risk. If you would invest  803.00  in Burford Capital on August 31, 2022 and sell it today you would earn a total of  97.00  from holding Burford Capital or generate 12.08% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Burford Capital  vs.  ATX

 Performance (%) 
       Timeline  

Burford Capital and ATX Volatility Contrast

   Predicted Return Density   
       Returns  

ATX

Pair trading matchups for ATX

The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against ATX as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. ATX's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, ATX's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to ATX.

Pair Trading with Burford Capital and ATX

The main advantage of trading using opposite Burford Capital and ATX positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Burford Capital position performs unexpectedly, ATX 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 ATX will offset losses from the drop in ATX's long position.
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The idea behind Burford Capital and ATX 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against ATX as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. ATX's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, ATX's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to ATX.
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.

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