Correlation Between Redwood Managed and NYSE Composite

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

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

Diversification Opportunities for Redwood Managed and NYSE Composite

0.91

Correlation Coefficient

Redwood Managed  NYSE Composite

Almost no diversification

The 3 months correlation between Redwood and NYSE is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Redwood Managed Volatility and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Redwood Managed 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 Redwood Managed Volatility 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 Redwood Managed i.e., Redwood Managed and NYSE Composite go up and down completely randomly.

Pair Corralation between Redwood Managed and NYSE Composite

Assuming the 90 days horizon Redwood Managed is expected to generate 17.59 times less return on investment than NYSE Composite. But when comparing it to its historical volatility, Redwood Managed Volatility is 2.63 times less risky than NYSE Composite. It trades about 0.01 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,553,589  in NYSE Composite on January 26, 2024 and sell it today you would earn a total of  222,219  from holding NYSE Composite or generate 14.3% return on investment over 90 days.

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

Redwood Managed Volatility  vs.  NYSE Composite

Pair Trading with Redwood Managed and NYSE Composite

The main advantage of trading using opposite Redwood Managed and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Redwood Managed 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 Redwood Managed Volatility 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.