Correlation Between Main Street and IPC

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

Diversification Opportunities for Main Street and IPC

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between Main Street and IPC is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Main Street Capital and IPC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IPC and Main Street 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 Main Street Capital are associated (or correlated) with IPC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IPC has no effect on the direction of Main Street i.e., Main Street and IPC go up and down completely randomly.
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Pair Corralation between Main Street and IPC

Given the investment horizon of 90 days Main Street Capital is expected to under-perform the IPC. In addition to that, Main Street is 1.92 times more volatile than IPC. It trades about -0.3 of its total potential returns per unit of risk. IPC is currently generating about -0.06 per unit of volatility. If you would invest  4,735,486  in IPC on July 8, 2022 and sell it today you would lose (133,130)  from holding IPC or give up 2.81% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy97.67%
ValuesDaily Returns

Main Street Capital  vs.  IPC

 Performance (%) 
       Timeline  

Main Street and IPC Volatility Contrast

   Predicted Return Density   
       Returns  

Main Street Capital

Pair trading matchups for Main Street

IPC

Pair trading matchups for IPC

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 IPC 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. IPC'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, IPC'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 IPC.

Pair Trading with Main Street and IPC

The main advantage of trading using opposite Main Street and IPC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Main Street position performs unexpectedly, IPC 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 IPC will offset losses from the drop in IPC's long position.
Main Street vs. Boeing Company
The idea behind Main Street Capital and IPC 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 IPC 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. IPC'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, IPC'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 IPC.
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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.

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