Correlation Between NYSE Composite and Consumer Discretionary

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

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

Diversification Opportunities for NYSE Composite and Consumer Discretionary

0.87

Correlation Coefficient

NYSE Composite  Consumer Discretionary

Very poor diversification

The 3 months correlation between NYSE and Consumer is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Consumer Discretionary Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary 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 Consumer Discretionary. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Discretionary has no effect on the direction of NYSE Composite i.e., NYSE Composite and Consumer Discretionary go up and down completely randomly.

Pair Corralation between NYSE Composite and Consumer Discretionary

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.83 times less return on investment than Consumer Discretionary. But when comparing it to its historical volatility, NYSE Composite is 1.66 times less risky than Consumer Discretionary. It trades about 0.08 of its potential returns per unit of risk. Consumer Discretionary Select is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  13,732  in Consumer Discretionary Select on September 2, 2024 and sell it today you would earn a total of  8,498  from holding Consumer Discretionary Select or generate 61.88% return on investment over 90 days.

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

NYSE Composite  vs.  Consumer Discretionary Select

Pair Trading with NYSE Composite and Consumer Discretionary

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

The idea behind NYSE Composite and Consumer Discretionary Select 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.