Can any of the company-specific risk be diversified away by investing in both Morningstar Unconstrained 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 Morningstar Unconstrained and NYSE Composite into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Morningstar Unconstrained Allocation and NYSE Composite, you can compare the effects of market volatilities on Morningstar Unconstrained 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 Morningstar Unconstrained with a short position of NYSE Composite. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Unconstrained and NYSE Composite.
Diversification Opportunities for Morningstar Unconstrained and NYSE Composite
The 3 months correlation between Morningstar and NYSE is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Unconstrained Allo and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Morningstar Unconstrained 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 Morningstar Unconstrained Allocation 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 Morningstar Unconstrained i.e., Morningstar Unconstrained and NYSE Composite go up and down completely randomly.
Pair Corralation between Morningstar Unconstrained and NYSE Composite
Assuming the 90 days horizon Morningstar Unconstrained is expected to generate 1.2 times less return on investment than NYSE Composite. But when comparing it to its historical volatility, Morningstar Unconstrained Allocation is 1.0 times less risky than NYSE Composite. It trades about 0.13 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 1,523,001 in NYSE Composite on September 2, 2023 and sell it today you would earn a total of 85,883 from holding NYSE Composite or generate 5.64% return on investment over 90 days.
Pair Trading with Morningstar Unconstrained and NYSE Composite
The main advantage of trading using opposite Morningstar Unconstrained and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morningstar Unconstrained 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 Morningstar Unconstrained Allocation 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.
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.
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