Correlation Between NYSE Composite and Diversified Income

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

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

Diversification Opportunities for NYSE Composite and Diversified Income

0.16

Correlation Coefficient

NYSE Composite  Diversified Income

Average diversification

The 3 months correlation between NYSE and Diversified is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Diversified Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Income 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 Diversified Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Income has no effect on the direction of NYSE Composite i.e., NYSE Composite and Diversified Income go up and down completely randomly.

Pair Corralation between NYSE Composite and Diversified Income

Assuming the 90 days trading horizon NYSE Composite is expected to generate 2.93 times more return on investment than Diversified Income. However, NYSE Composite is 2.93 times more volatile than Diversified Income Fund. It trades about 0.17 of its potential returns per unit of risk. Diversified Income Fund is currently generating about 0.09 per unit of risk. If you would invest  1,900,192  in NYSE Composite on September 4, 2024 and sell it today you would earn a total of  121,130  from holding NYSE Composite or generate 6.37% return on investment over 90 days.

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

NYSE Composite  vs.  Diversified Income Fund

Pair Trading with NYSE Composite and Diversified Income

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

The idea behind NYSE Composite and Diversified Income Fund 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.

Check out your portfolio center.

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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.