Correlation Between Nasdaq and SP 500

Can any of the company-specific risk be diversified away by investing in both Nasdaq and SP 500 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 SP 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq Inc and SP 500 Financials, you can compare the effects of market volatilities on Nasdaq and SP 500 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 SP 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq and SP 500.

Diversification Opportunities for Nasdaq and SP 500

0.92

Correlation Coefficient

Nasdaq  SP 500

Almost no diversification

The 3 months correlation between Nasdaq and SPSY is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq Inc and SP 500 Financials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP 500 Financials 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 SP 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP 500 Financials has no effect on the direction of Nasdaq i.e., Nasdaq and SP 500 go up and down completely randomly.

Pair Corralation between Nasdaq and SP 500

Given the investment horizon of 90 days Nasdaq is expected to generate 1.05 times less return on investment than SP 500. But when comparing it to its historical volatility, Nasdaq Inc is 1.1 times less risky than SP 500. It trades about 0.12 of its potential returns per unit of risk. SP 500 Financials is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  75,004  in SP 500 Financials on October 1, 2024 and sell it today you would earn a total of  6,136  from holding SP 500 Financials or generate 8.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Nasdaq Inc  vs.  SP 500 Financials

Pair Trading with Nasdaq and SP 500

The main advantage of trading using opposite Nasdaq and SP 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq position performs unexpectedly, SP 500 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 SP 500 will offset losses from the drop in SP 500's long position.

The idea behind Nasdaq Inc and SP 500 Financials 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.