Correlation Between SPDR SP and AAM SP

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

By analyzing existing cross correlation between SPDR SP 400 and AAM SP 500, you can compare the effects of market volatilities on SPDR SP and AAM SP 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 SPDR SP with a short position of AAM SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and AAM SP.

Diversification Opportunities for SPDR SP and AAM SP

0.93

Correlation Coefficient

SPDR SP  AAM SP

Almost no diversification

The 3 months correlation between SPDR and AAM is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 400 and AAM SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AAM SP 500 and SPDR SP 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 SPDR SP 400 are associated (or correlated) with AAM SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AAM SP 500 has no effect on the direction of SPDR SP i.e., SPDR SP and AAM SP go up and down completely randomly.

Pair Corralation between SPDR SP and AAM SP

Given the investment horizon of 90 days SPDR SP 400 is expected to generate 1.43 times more return on investment than AAM SP. However, SPDR SP is 1.43 times more volatile than AAM SP 500. It trades about 0.19 of its potential returns per unit of risk. AAM SP 500 is currently generating about 0.21 per unit of risk. If you would invest  7,701  in SPDR SP 400 on September 2, 2024 and sell it today you would earn a total of  961.00  from holding SPDR SP 400 or generate 12.48% return on investment over 90 days.

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

SPDR SP 400  vs.  AAM SP 500

SPDR SP 400

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 400 are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

AAM SP 500

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in AAM SP 500 are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile fundamental indicators, AAM SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with SPDR SP and AAM SP

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

The idea behind SPDR SP 400 and AAM SP 500 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.