Correlation Between Nasdaq and ARCA Biotechnology

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

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

Diversification Opportunities for Nasdaq and ARCA Biotechnology

0.17

Correlation Coefficient

Nasdaq  ARCA Biotechnology

Average diversification

The 3 months correlation between Nasdaq and ARCA is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq Inc and ARCA Biotechnology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Biotechnology and Nasdaq 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 Nasdaq Inc are associated (or correlated) with ARCA Biotechnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Biotechnology has no effect on the direction of Nasdaq i.e., Nasdaq and ARCA Biotechnology go up and down completely randomly.

Pair Corralation between Nasdaq and ARCA Biotechnology

Given the investment horizon of 90 days Nasdaq Inc is expected to generate 0.8 times more return on investment than ARCA Biotechnology. However, Nasdaq Inc is 1.25 times less risky than ARCA Biotechnology. It trades about 0.1 of its potential returns per unit of risk. ARCA Biotechnology is currently generating about -0.05 per unit of risk. If you would invest  7,408  in Nasdaq Inc on September 21, 2024 and sell it today you would earn a total of  330.00  from holding Nasdaq Inc or generate 4.45% return on investment over 90 days.

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

Nasdaq Inc  vs.  ARCA Biotechnology

Pair Trading with Nasdaq and ARCA Biotechnology

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

The idea behind Nasdaq Inc and ARCA Biotechnology 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.