Correlation Between NYSE Composite and LILLY

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

By analyzing existing cross correlation between NYSE Composite and LILLY ELI 55, you can compare the effects of market volatilities on NYSE Composite and LILLY 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 LILLY. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and LILLY.

Diversification Opportunities for NYSE Composite and LILLY

-0.43

Correlation Coefficient

NYSE Composite  LILLY

Very good diversification

The 3 months correlation between NYSE and LILLY is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and LILLY ELI 55 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LILLY ELI 55 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 LILLY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LILLY ELI 55 has no effect on the direction of NYSE Composite i.e., NYSE Composite and LILLY go up and down completely randomly.

Pair Corralation between NYSE Composite and LILLY

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.44 times more return on investment than LILLY. However, NYSE Composite is 1.44 times more volatile than LILLY ELI 55. It trades about 0.08 of its potential returns per unit of risk. LILLY ELI 55 is currently generating about -0.14 per unit of risk. If you would invest  1,925,638  in NYSE Composite on September 14, 2024 and sell it today you would earn a total of  51,271  from holding NYSE Composite or generate 2.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	80.95%
Values	Daily Returns

NYSE Composite  vs.  LILLY ELI 55

Pair Trading with NYSE Composite and LILLY

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

The idea behind NYSE Composite and LILLY ELI 55 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.