Two Equities Correlation Analysis

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Can any of the company-specific risk be diversified away by investing in both Danske Invest and NYSE Composite 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 Danske Invest and NYSE Composite into the same portfolio, which is an essential part of the fundamental portfolio management process.
This model provides you with a quick lookup of cross correlation between two equities. Please specify two instruments to run the correlation.

Diversification Opportunities for Danske Invest and NYSE Composite

0.85
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Danske and NYSE is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Danske Invest and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Danske Invest 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 Danske Invest are associated (or correlated) with NYSE Composite. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NYSE Composite has no effect on the direction of Danske Invest i.e., Danske Invest and NYSE Composite go up and down completely randomly.
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Pair Corralation between Danske Invest and NYSE Composite

Assuming the 90 days trading horizon Danske Invest is expected to generate 1.0 times more return on investment than NYSE Composite. However, Danske Invest is 1.0 times more volatile than NYSE Composite. It trades about 0.01 of its potential returns per unit of risk. NYSE Composite is currently generating about -0.31 per unit of risk. If you would invest  57,937  in Danske Invest on January 20, 2024 and sell it today you would earn a total of  33.00  from holding Danske Invest or generate 0.06% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy95.24%
ValuesDaily Returns

Danske Invest   vs.  NYSE Composite

 Performance 
       Timeline  

Danske Invest and NYSE Composite Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Danske Invest and NYSE Composite

The main advantage of trading using opposite Danske Invest and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Danske Invest position performs unexpectedly, NYSE Composite 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 NYSE Composite will offset losses from the drop in NYSE Composite's long position.
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The idea behind Danske Invest and NYSE Composite 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.

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