Correlation Between Avantis Small and NYSE Composite

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

By analyzing existing cross correlation between Avantis Small Cap and NYSE Composite, you can compare the effects of market volatilities on Avantis Small and NYSE Composite 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 Avantis Small with a short position of NYSE Composite. Check out your portfolio center. Please also check ongoing floating volatility patterns of Avantis Small and NYSE Composite.

Diversification Opportunities for Avantis Small and NYSE Composite

0.92

Correlation Coefficient

Avantis Small  NYSE Composite

Almost no diversification

The 3 months correlation between Avantis and NYSE is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Avantis Small Cap and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Avantis Small 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 Avantis Small Cap 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 Avantis Small i.e., Avantis Small and NYSE Composite go up and down completely randomly.

Pair Corralation between Avantis Small and NYSE Composite

Given the investment horizon of 90 days Avantis Small Cap is expected to generate 1.84 times more return on investment than NYSE Composite. However, Avantis Small is 1.84 times more volatile than NYSE Composite. It trades about 0.09 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.12 per unit of risk. If you would invest  7,058  in Avantis Small Cap on February 23, 2024 and sell it today you would earn a total of  2,061  from holding Avantis Small Cap or generate 29.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.6%
Values	Daily Returns

Avantis Small Cap  vs.  NYSE Composite

Pair Trading with Avantis Small and NYSE Composite

The main advantage of trading using opposite Avantis Small and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Avantis Small 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.

The idea behind Avantis Small Cap 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.