Can any of the company-specific risk be diversified away by investing in both NYSE Composite and Lifestyle 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 Lifestyle into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NYSE Composite and Lifestyle Ii Aggressive, you can compare the effects of market volatilities on NYSE Composite and Lifestyle 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 Lifestyle. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Lifestyle.
Diversification Opportunities for NYSE Composite and Lifestyle
The 3 months correlation between NYSE and Lifestyle is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and LIFESTYLE II AGGRESSIVE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lifestyle Ii Aggressive 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 Lifestyle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lifestyle Ii Aggressive has no effect on the direction of NYSE Composite i.e., NYSE Composite and Lifestyle go up and down completely randomly.
Pair Corralation between NYSE Composite and Lifestyle
Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.09 times less return on investment than Lifestyle. But when comparing it to its historical volatility, NYSE Composite is 1.07 times less risky than Lifestyle. It trades about 0.31 of its potential returns per unit of risk. Lifestyle Ii Aggressive is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest 1,102 in Lifestyle Ii Aggressive on September 7, 2023 and sell it today you would earn a total of 53.00 from holding Lifestyle Ii Aggressive or generate 4.81% return on investment over 90 days.
The main advantage of trading using opposite NYSE Composite and Lifestyle positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NYSE Composite position performs unexpectedly, Lifestyle 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 Lifestyle will offset losses from the drop in Lifestyle's long position.
The idea behind NYSE Composite and Lifestyle Ii Aggressive 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.
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