Correlation Between NYSE Composite and LENNAR

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

By analyzing existing cross correlation between NYSE Composite and LENNAR P 5, you can compare the effects of market volatilities on NYSE Composite and LENNAR 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 LENNAR. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and LENNAR.

Diversification Opportunities for NYSE Composite and LENNAR

0.04

Correlation Coefficient

NYSE Composite  LENNAR

Significant diversification

The 3 months correlation between NYSE and LENNAR is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and LENNAR P 5 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LENNAR P 5 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 LENNAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LENNAR P 5 has no effect on the direction of NYSE Composite i.e., NYSE Composite and LENNAR go up and down completely randomly.

Pair Corralation between NYSE Composite and LENNAR

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.28 times more return on investment than LENNAR. However, NYSE Composite is 1.28 times more volatile than LENNAR P 5. It trades about 0.07 of its potential returns per unit of risk. LENNAR P 5 is currently generating about 0.01 per unit of risk. If you would invest  1,515,445  in NYSE Composite on September 24, 2024 and sell it today you would earn a total of  396,499  from holding NYSE Composite or generate 26.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.77%
Values	Daily Returns

NYSE Composite  vs.  LENNAR P 5

Pair Trading with NYSE Composite and LENNAR

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

The idea behind NYSE Composite and LENNAR P 5 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.