Correlation Between Select STOXX and NATO

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

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

Diversification Opportunities for Select STOXX and NATO

0.57

Correlation Coefficient

Select STOXX  NATO

Very weak diversification

The 3 months correlation between Select and NATO is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Select STOXX Europe and NATO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NATO and Select STOXX 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 Select STOXX Europe are associated (or correlated) with NATO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NATO has no effect on the direction of Select STOXX i.e., Select STOXX and NATO go up and down completely randomly.

Pair Corralation between Select STOXX and NATO

Given the investment horizon of 90 days Select STOXX Europe is expected to under-perform the NATO. But the etf apears to be less risky and, when comparing its historical volatility, Select STOXX Europe is 1.01 times less risky than NATO. The etf trades about -0.01 of its potential returns per unit of risk. The NATO is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,539  in NATO on September 13, 2024 and sell it today you would earn a total of  79.00  from holding NATO or generate 3.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	83.72%
Values	Daily Returns

Select STOXX Europe  vs.  NATO

Select STOXX Europe

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Select STOXX Europe has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Select STOXX is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

NATO

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NATO are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, NATO is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Select STOXX and NATO

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

The idea behind Select STOXX Europe and NATO 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.