Correlation Between NYSE Composite and Aqua Power

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

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

Diversification Opportunities for NYSE Composite and Aqua Power

0.65

Correlation Coefficient

NYSE Composite  Aqua Power

Poor diversification

The 3 months correlation between NYSE and Aqua is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Aqua Power Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aqua Power Systems and NYSE Composite 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 NYSE Composite are associated (or correlated) with Aqua Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aqua Power Systems has no effect on the direction of NYSE Composite i.e., NYSE Composite and Aqua Power go up and down completely randomly.

Pair Corralation between NYSE Composite and Aqua Power

Assuming the 90 days trading horizon NYSE Composite is expected to generate 13.25 times less return on investment than Aqua Power. But when comparing it to its historical volatility, NYSE Composite is 3.74 times less risky than Aqua Power. It trades about 0.05 of its potential returns per unit of risk. Aqua Power Systems is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  2.08  in Aqua Power Systems on December 5, 2024 and sell it today you would earn a total of  0.37  from holding Aqua Power Systems or generate 17.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.5%
Values	Daily Returns

NYSE Composite  vs.  Aqua Power Systems

Pair Trading with NYSE Composite and Aqua Power

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

The idea behind NYSE Composite and Aqua Power Systems 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.