Correlation Between NYSE Composite and Benchmark Bankshares

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

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

Diversification Opportunities for NYSE Composite and Benchmark Bankshares

0.09

Correlation Coefficient

NYSE Composite  Benchmark Bankshares

Significant diversification

The 3 months correlation between NYSE and Benchmark is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Benchmark Bankshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Benchmark Bankshares 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 Benchmark Bankshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Benchmark Bankshares has no effect on the direction of NYSE Composite i.e., NYSE Composite and Benchmark Bankshares go up and down completely randomly.

Pair Corralation between NYSE Composite and Benchmark Bankshares

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.07 times less return on investment than Benchmark Bankshares. But when comparing it to its historical volatility, NYSE Composite is 3.07 times less risky than Benchmark Bankshares. It trades about 0.06 of its potential returns per unit of risk. Benchmark Bankshares is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  2,400  in Benchmark Bankshares on September 29, 2024 and sell it today you would earn a total of  200.00  from holding Benchmark Bankshares or generate 8.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	87.61%
Values	Daily Returns

NYSE Composite  vs.  Benchmark Bankshares

Pair Trading with NYSE Composite and Benchmark Bankshares

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

The idea behind NYSE Composite and Benchmark Bankshares 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.