Correlation Between State Street and NYSE Composite

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

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

Diversification Opportunities for State Street and NYSE Composite

0.8

Correlation Coefficient

State Street NYSE Composite

Very poor diversification

The 3 months correlation between State and NYSE Composite is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding State Street and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and State Street 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 State Street 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 State Street i.e., State Street and NYSE Composite go up and down completely randomly.

Pair Corralation between State Street and NYSE Composite

If you would invest (100.00)  in State Street on December 20, 2022 and sell it today you would earn a total of  100.00  from holding State Street or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	0.0%
Values	Daily Returns

State Street  vs.  NYSE Composite

Pair Trading with State Street and NYSE Composite

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

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The idea behind State Street 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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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 Equity Valuation module to check real value of public entities based on technical and fundamental data.