Correlation Between Nasdaq and Value Equity

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

By analyzing existing cross correlation between Nasdaq Inc and Value Equity Investor, you can compare the effects of market volatilities on Nasdaq and Value Equity 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 Nasdaq with a short position of Value Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq and Value Equity.

Diversification Opportunities for Nasdaq and Value Equity

0.85

Correlation Coefficient

Nasdaq  Value Equity

Very poor diversification

The 3 months correlation between Nasdaq and Value is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq Inc and Value Equity Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Value Equity Investor and Nasdaq 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 Nasdaq Inc are associated (or correlated) with Value Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Value Equity Investor has no effect on the direction of Nasdaq i.e., Nasdaq and Value Equity go up and down completely randomly.

Pair Corralation between Nasdaq and Value Equity

Given the investment horizon of 90 days Nasdaq Inc is expected to generate 1.65 times more return on investment than Value Equity. However, Nasdaq is 1.65 times more volatile than Value Equity Investor. It trades about 0.06 of its potential returns per unit of risk. Value Equity Investor is currently generating about 0.04 per unit of risk. If you would invest  5,278  in Nasdaq Inc on December 27, 2024 and sell it today you would earn a total of  2,439  from holding Nasdaq Inc or generate 46.21% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.8%
Values	Daily Returns

Nasdaq Inc  vs.  Value Equity Investor

Nasdaq Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nasdaq Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Nasdaq is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Value Equity Investor

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity Investor are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Value Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Nasdaq and Value Equity

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

The idea behind Nasdaq Inc and Value Equity Investor 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.