Correlation Between NYSE Composite and Federal Home

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

By analyzing existing cross correlation between NYSE Composite and Federal Home 530, you can compare the effects of market volatilities on NYSE Composite and Federal Home 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 Federal Home. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Federal Home.

Diversification Opportunities for NYSE Composite and Federal Home

0.72

Correlation Coefficient

NYSE Composite  Federal Home

Poor diversification

The 3 months correlation between NYSE and Federal is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Federal Home 530 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Home 530 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 Federal Home. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Home 530 has no effect on the direction of NYSE Composite i.e., NYSE Composite and Federal Home go up and down completely randomly.

Pair Corralation between NYSE Composite and Federal Home

Assuming the 90 days trading horizon NYSE Composite is expected to generate 18.82 times less return on investment than Federal Home. But when comparing it to its historical volatility, NYSE Composite is 19.12 times less risky than Federal Home. It trades about 0.18 of its potential returns per unit of risk. Federal Home 530 is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  595.00  in Federal Home 530 on September 5, 2024 and sell it today you would earn a total of  1,008  from holding Federal Home 530 or generate 169.41% return on investment over 90 days.

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

NYSE Composite  vs.  Federal Home 530

Pair Trading with NYSE Composite and Federal Home

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

The idea behind NYSE Composite and Federal Home 530 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.