Correlation Between NYSE Composite and Beacon

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

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

Diversification Opportunities for NYSE Composite and Beacon

-0.19

Correlation Coefficient

NYSE Composite  Beacon

Good diversification

The 3 months correlation between NYSE and Beacon is -0.19. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Beacon Roofing Supply in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Beacon Roofing Supply 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 Beacon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Beacon Roofing Supply has no effect on the direction of NYSE Composite i.e., NYSE Composite and Beacon go up and down completely randomly.

Pair Corralation between NYSE Composite and Beacon

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.21 times more return on investment than Beacon. However, NYSE Composite is 1.21 times more volatile than Beacon Roofing Supply. It trades about 0.18 of its potential returns per unit of risk. Beacon Roofing Supply is currently generating about -0.07 per unit of risk. If you would invest  1,887,802  in NYSE Composite on September 5, 2024 and sell it today you would earn a total of  130,779  from holding NYSE Composite or generate 6.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	76.19%
Values	Daily Returns

NYSE Composite  vs.  Beacon Roofing Supply

Pair Trading with NYSE Composite and Beacon

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

The idea behind NYSE Composite and Beacon Roofing Supply 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.