Correlation Between NYSE Composite and Berkshire Hathaway

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

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

Diversification Opportunities for NYSE Composite and Berkshire Hathaway

0.31

Correlation Coefficient

NYSE Composite  Berkshire Hathaway

Weak diversification

The 3 months correlation between NYSE and Berkshire is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Berkshire Hathaway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Berkshire Hathaway 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 Berkshire Hathaway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Berkshire Hathaway has no effect on the direction of NYSE Composite i.e., NYSE Composite and Berkshire Hathaway go up and down completely randomly.

Pair Corralation between NYSE Composite and Berkshire Hathaway

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.7 times less return on investment than Berkshire Hathaway. But when comparing it to its historical volatility, NYSE Composite is 1.24 times less risky than Berkshire Hathaway. It trades about 0.09 of its potential returns per unit of risk. Berkshire Hathaway is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  27,945  in Berkshire Hathaway on March 19, 2024 and sell it today you would earn a total of  10,015  from holding Berkshire Hathaway or generate 35.84% return on investment over 90 days.

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

NYSE Composite  vs.  Berkshire Hathaway

Pair Trading with NYSE Composite and Berkshire Hathaway

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

The idea behind NYSE Composite and Berkshire Hathaway 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.