Correlation Between IShares MSCI and NYSE Composite

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

By analyzing existing cross correlation between iShares MSCI USA and NYSE Composite, you can compare the effects of market volatilities on IShares MSCI 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 IShares MSCI with a short position of NYSE Composite. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and NYSE Composite.

Diversification Opportunities for IShares MSCI and NYSE Composite

0.95

Correlation Coefficient

IShares MSCI  NYSE Composite

Almost no diversification

The 3 months correlation between IShares and NYSE is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI USA and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and IShares MSCI 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 iShares MSCI USA 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 IShares MSCI i.e., IShares MSCI and NYSE Composite go up and down completely randomly.

Pair Corralation between IShares MSCI and NYSE Composite

Given the investment horizon of 90 days iShares MSCI USA is expected to generate 1.13 times more return on investment than NYSE Composite. However, IShares MSCI is 1.13 times more volatile than NYSE Composite. It trades about 0.12 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.04 per unit of risk. If you would invest  11,850  in iShares MSCI USA on January 17, 2024 and sell it today you would earn a total of  3,967  from holding iShares MSCI USA or generate 33.48% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.68%
Values	Daily Returns

iShares MSCI USA  vs.  NYSE Composite

Pair Trading with IShares MSCI and NYSE Composite

The main advantage of trading using opposite IShares MSCI and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares MSCI 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 iShares MSCI USA 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.

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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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.