Understanding Diversifiable Risk
When investing in cryptocurrencies like Binance Coin (BNB) and Cardano (ADA), diversification is key to mitigating company-specific risks. While correlation coefficients alone can't predict future returns, they help quantify how combining these assets may reduce portfolio volatility.
Key Metrics
- 3-month correlation: 0.38 (weak positive relationship)
- Risk-adjusted returns: Binance Coin outperforms Cardano by 0.32x but carries 3.08x lower risk.
- 90-day investment example: A $63,386 investment in BNB on April 5, 2025, yielded a 4.13% return ($2,619 profit).
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Volatility and Performance
Binance Coin (BNB)
- Risk-adjusted rank: Modest (top 11% globally).
- Recent solid returns suggest potential upward momentum despite mixed fundamentals.
Cardano (ADA)
- Risk-adjusted rank: Very weak (bottom 3% globally).
- Currently underperforming but may approach a reversal point in mid-2025.
Pair Trading Strategies
Advantage: Hedges unsystematic risk by offsetting losses in one asset with gains in the other. For instance, if ADA declines, short positions can balance BNB’s long positions.
How to implement:
- Identify highly correlated crypto pairs.
- Design market-neutral trades to minimize directional market impact.
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FAQs
Q: Can Binance Coin and Cardano diversify my portfolio effectively?
A: Weak correlation (0.38) limits diversification benefits, but pair trading can hedge risks.
Q: Which asset has better risk-adjusted returns?
A: Binance Coin offers higher returns per unit of risk (0.15 vs. ADA’s -0.05).
Q: How do I start pair trading?
A: Use tools to analyze correlations and execute offsetting long/short positions.
Complementary Tools
| Tool | Purpose |
|------|---------|
| Pair Correlation | Compare equity instruments |
| Fundamental Analysis | Evaluate financial statements |
| Aroon Oscillator | Gauge market momentum |
Note: Always cross-analyze with technical indicators and market trends.
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