Correlation Between NATO and Select STOXX

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

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

Diversification Opportunities for NATO and Select STOXX

0.57

Correlation Coefficient

NATO  Select STOXX

Very weak diversification

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

Pair Corralation between NATO and Select STOXX

Given the investment horizon of 90 days NATO is expected to generate 1.01 times more return on investment than Select STOXX. However, NATO is 1.01 times more volatile than Select STOXX Europe. It trades about 0.06 of its potential returns per unit of risk. Select STOXX Europe is currently generating about -0.01 per unit of risk. 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

NATO  vs.  Select STOXX Europe

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.

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.

Pair Trading with NATO and Select STOXX

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

The idea behind NATO and Select STOXX Europe 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.