Correlation Between NYSE Composite and ADX

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

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

Diversification Opportunities for NYSE Composite and ADX

0.64

Correlation Coefficient

NYSE Composite  ADX

Poor diversification

The 3 months correlation between NYSE and ADX is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and ADX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ADX and NYSE Composite 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 NYSE Composite are associated (or correlated) with ADX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ADX has no effect on the direction of NYSE Composite i.e., NYSE Composite and ADX go up and down completely randomly.

Pair Corralation between NYSE Composite and ADX

Assuming the 90 days trading horizon NYSE Composite is expected to generate 7.26 times less return on investment than ADX. But when comparing it to its historical volatility, NYSE Composite is 8.51 times less risky than ADX. It trades about 0.17 of its potential returns per unit of risk. ADX is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  14.00  in ADX on September 1, 2024 and sell it today you would earn a total of  7.00  from holding ADX or generate 50.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.92%
Values	Daily Returns

NYSE Composite  vs.  ADX

Pair Trading with NYSE Composite and ADX

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

The idea behind NYSE Composite and ADX 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.