Correlation Between NYSE Composite and LUN

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

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

Diversification Opportunities for NYSE Composite and LUN

0.77

Correlation Coefficient

NYSE Composite  LUN

Poor diversification

The 3 months correlation between NYSE and LUN is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and LUN in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LUN 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 LUN. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LUN has no effect on the direction of NYSE Composite i.e., NYSE Composite and LUN go up and down completely randomly.

Pair Corralation between NYSE Composite and LUN

Assuming the 90 days trading horizon NYSE Composite is expected to generate 8.26 times less return on investment than LUN. But when comparing it to its historical volatility, NYSE Composite is 5.65 times less risky than LUN. It trades about 0.17 of its potential returns per unit of risk. LUN is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  1.21  in LUN on September 2, 2024 and sell it today you would earn a total of  0.82  from holding LUN or generate 67.77% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.97%
Values	Daily Returns

NYSE Composite  vs.  LUN

Pair Trading with NYSE Composite and LUN

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

The idea behind NYSE Composite and LUN 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.