Correlation Between NYSE Composite and Pao

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

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

Diversification Opportunities for NYSE Composite and Pao

-0.58

Correlation Coefficient

NYSE Composite  Pao

Excellent diversification

The 3 months correlation between NYSE and Pao is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Pao Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pao Group 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 Pao. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pao Group has no effect on the direction of NYSE Composite i.e., NYSE Composite and Pao go up and down completely randomly.

Pair Corralation between NYSE Composite and Pao

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.79 times less return on investment than Pao. But when comparing it to its historical volatility, NYSE Composite is 25.07 times less risky than Pao. It trades about 0.13 of its potential returns per unit of risk. Pao Group is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  0.05  in Pao Group on September 12, 2024 and sell it today you would lose (0.02) from holding Pao Group or give up 40.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

NYSE Composite  vs.  Pao Group

Pair Trading with NYSE Composite and Pao

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

The idea behind NYSE Composite and Pao Group 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.