Correlation Between NXT and NXS

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

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

Diversification Opportunities for NXT and NXS

1.0

Correlation Coefficient

NXT  NXS

No risk reduction

The 3 months correlation between NXT and NXS is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding NXT and NXS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXS and NXT 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 NXT are associated (or correlated) with NXS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXS has no effect on the direction of NXT i.e., NXT and NXS go up and down completely randomly.

Pair Corralation between NXT and NXS

Assuming the 90 days trading horizon NXT is expected to generate 3.22 times more return on investment than NXS. However, NXT is 3.22 times more volatile than NXS. It trades about 0.04 of its potential returns per unit of risk. NXS is currently generating about 0.08 per unit of risk. If you would invest  0.14  in NXT on September 1, 2024 and sell it today you would lose (0.05) from holding NXT or give up 33.52% of portfolio value over 90 days.

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

NXT  vs.  NXS

NXT

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in NXT are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, NXT exhibited solid returns over the last few months and may actually be approaching a breakup point.

NXS

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in NXS are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, NXS exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NXT and NXS

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

The idea behind NXT and NXS 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.