Correlation Between NYSE Composite and PharmChem

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

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

Diversification Opportunities for NYSE Composite and PharmChem

-0.25

Correlation Coefficient

NYSE Composite  PharmChem

Very good diversification

The 3 months correlation between NYSE and PharmChem is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and PharmChem in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PharmChem 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 PharmChem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PharmChem has no effect on the direction of NYSE Composite i.e., NYSE Composite and PharmChem go up and down completely randomly.

Pair Corralation between NYSE Composite and PharmChem

Assuming the 90 days trading horizon NYSE Composite is expected to generate 0.28 times more return on investment than PharmChem. However, NYSE Composite is 3.6 times less risky than PharmChem. It trades about -0.02 of its potential returns per unit of risk. PharmChem is currently generating about -0.06 per unit of risk. If you would invest  1,938,118  in NYSE Composite on September 25, 2024 and sell it today you would lose (17,407) from holding NYSE Composite or give up 0.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

NYSE Composite  vs.  PharmChem

Pair Trading with NYSE Composite and PharmChem

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

The idea behind NYSE Composite and PharmChem 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.