Can any of the company-specific risk be diversified away by investing in both NYSE Composite and Godaddy 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 Godaddy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NYSE Composite and Godaddy, you can compare the effects of market volatilities on NYSE Composite and Godaddy 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 Godaddy. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Godaddy.
Diversification Opportunities for NYSE Composite and Godaddy
The 3 months correlation between NYSE and Godaddy is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Godaddy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Godaddy 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 Godaddy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Godaddy has no effect on the direction of NYSE Composite i.e., NYSE Composite and Godaddy go up and down completely randomly.
Pair Corralation between NYSE Composite and Godaddy
Assuming the 90 days trading horizon NYSE Composite is expected to generate 5.55 times less return on investment than Godaddy. But when comparing it to its historical volatility, NYSE Composite is 2.9 times less risky than Godaddy. It trades about 0.16 of its potential returns per unit of risk. Godaddy is currently generating about 0.31 of returns per unit of risk over similar time horizon. If you would invest 7,409 in Godaddy on September 2, 2023 and sell it today you would earn a total of 2,597 from holding Godaddy or generate 35.05% return on investment over 90 days.
The main advantage of trading using opposite NYSE Composite and Godaddy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NYSE Composite position performs unexpectedly, Godaddy 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 Godaddy will offset losses from the drop in Godaddy's long position.
The idea behind NYSE Composite and Godaddy 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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