Correlation Between NYSE Composite and Fam Small

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

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

Diversification Opportunities for NYSE Composite and Fam Small

0.88

Correlation Coefficient

NYSE Composite  Fam Small

Very poor diversification

The 3 months correlation between NYSE and Fam is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Fam Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fam Small Cap 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 Fam Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fam Small Cap has no effect on the direction of NYSE Composite i.e., NYSE Composite and Fam Small go up and down completely randomly.

Pair Corralation between NYSE Composite and Fam Small

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.82 times less return on investment than Fam Small. But when comparing it to its historical volatility, NYSE Composite is 1.6 times less risky than Fam Small. It trades about 0.12 of its potential returns per unit of risk. Fam Small Cap is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  2,458  in Fam Small Cap on September 15, 2024 and sell it today you would earn a total of  469.00  from holding Fam Small Cap or generate 19.08% return on investment over 90 days.

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

NYSE Composite  vs.  Fam Small Cap

Pair Trading with NYSE Composite and Fam Small

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

The idea behind NYSE Composite and Fam Small Cap 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.