Correlation Between NYSE Composite and FT Cboe

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

By analyzing existing cross correlation between NYSE Composite and FT Cboe Vest, you can compare the effects of market volatilities on NYSE Composite and FT Cboe 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 FT Cboe. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and FT Cboe.

Diversification Opportunities for NYSE Composite and FT Cboe

0.5

Correlation Coefficient

NYSE Composite  FT Cboe

Very weak diversification

The 3 months correlation between NYSE and BUFQ is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and FT Cboe Vest in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FT Cboe Vest 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 FT Cboe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FT Cboe Vest has no effect on the direction of NYSE Composite i.e., NYSE Composite and FT Cboe go up and down completely randomly.

Pair Corralation between NYSE Composite and FT Cboe

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.93 times less return on investment than FT Cboe. In addition to that, NYSE Composite is 1.18 times more volatile than FT Cboe Vest. It trades about 0.07 of its total potential returns per unit of risk. FT Cboe Vest is currently generating about 0.15 per unit of volatility. If you would invest  1,985  in FT Cboe Vest on September 22, 2024 and sell it today you would earn a total of  1,173  from holding FT Cboe Vest or generate 59.09% return on investment over 90 days.

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

NYSE Composite  vs.  FT Cboe Vest

Pair Trading with NYSE Composite and FT Cboe

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

The idea behind NYSE Composite and FT Cboe Vest 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.