Correlation Between NYSE Composite and Capital Income

Can any of the company-specific risk be diversified away by investing in both NYSE Composite and Capital 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 Capital 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 Capital Income Builder, you can compare the effects of market volatilities on NYSE Composite and Capital 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 Capital Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Capital Income.

Diversification Opportunities for NYSE Composite and Capital Income

0.08

Correlation Coefficient

NYSE Composite  Capital Income

Significant diversification

The 3 months correlation between NYSE and Capital is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Capital Income Builder in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital Income Builder 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 Capital Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital Income Builder has no effect on the direction of NYSE Composite i.e., NYSE Composite and Capital Income go up and down completely randomly.

Pair Corralation between NYSE Composite and Capital Income

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.38 times more return on investment than Capital Income. However, NYSE Composite is 1.38 times more volatile than Capital Income Builder. It trades about 0.13 of its potential returns per unit of risk. Capital Income Builder is currently generating about 0.14 per unit of risk. If you would invest  1,588,163  in NYSE Composite on September 14, 2024 and sell it today you would earn a total of  388,746  from holding NYSE Composite or generate 24.48% 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.  Capital Income Builder

Pair Trading with NYSE Composite and Capital Income

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

The idea behind NYSE Composite and Capital Income Builder 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.