Correlation Between NYSE Composite and IDLB

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

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

Diversification Opportunities for NYSE Composite and IDLB

0.03

Correlation Coefficient

NYSE Composite IDLB

Significant diversification

The 3 months correlation between NYSE and IDLB is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and IDLB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IDLB 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 IDLB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IDLB has no effect on the direction of NYSE Composite i.e., NYSE Composite and IDLB go up and down completely randomly.

Pair Corralation between NYSE Composite and IDLB

Assuming the 90 days trading horizon NYSE Composite is expected to generate 0.96 times more return on investment than IDLB. However, NYSE Composite is 1.05 times less risky than IDLB. It trades about 0.04 of its potential returns per unit of risk. IDLB is currently generating about 0.03 per unit of risk. If you would invest  1,417,124  in NYSE Composite on March 11, 2023 and sell it today you would earn a total of  133,140  from holding NYSE Composite or generate 9.4% return on investment over 90 days.

NYSE Composite  vs.  IDLB

Pair Trading with NYSE Composite and IDLB

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

The idea behind NYSE Composite and IDLB 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.