Correlation Between NYSE Composite and Mitsui Chemicals

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

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

Diversification Opportunities for NYSE Composite and Mitsui Chemicals

-0.04

Correlation Coefficient

NYSE Composite  Mitsui Chemicals

Good diversification

The 3 months correlation between NYSE and Mitsui is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Mitsui Chemicals ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mitsui Chemicals ADR 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 Mitsui Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mitsui Chemicals ADR has no effect on the direction of NYSE Composite i.e., NYSE Composite and Mitsui Chemicals go up and down completely randomly.

Pair Corralation between NYSE Composite and Mitsui Chemicals

Assuming the 90 days trading horizon NYSE Composite is expected to generate 0.15 times more return on investment than Mitsui Chemicals. However, NYSE Composite is 6.87 times less risky than Mitsui Chemicals. It trades about -0.03 of its potential returns per unit of risk. Mitsui Chemicals ADR is currently generating about -0.08 per unit of risk. If you would invest  1,951,644  in NYSE Composite on September 29, 2024 and sell it today you would lose (27,796) from holding NYSE Composite or give up 1.42% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

NYSE Composite  vs.  Mitsui Chemicals ADR

Pair Trading with NYSE Composite and Mitsui Chemicals

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

The idea behind NYSE Composite and Mitsui Chemicals ADR 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.