Correlation Between NYSE Composite and Government Street

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

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

Diversification Opportunities for NYSE Composite and Government Street

0.63

Correlation Coefficient

NYSE Composite  Government Street

Poor diversification

The 3 months correlation between NYSE and Government is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Government Street Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Street Equity 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 Government Street. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Street Equity has no effect on the direction of NYSE Composite i.e., NYSE Composite and Government Street go up and down completely randomly.

Pair Corralation between NYSE Composite and Government Street

Assuming the 90 days trading horizon NYSE Composite is expected to under-perform the Government Street. But the index apears to be less risky and, when comparing its historical volatility, NYSE Composite is 1.32 times less risky than Government Street. The index trades about -0.26 of its potential returns per unit of risk. The Government Street Equity is currently generating about -0.11 of returns per unit of risk over similar time horizon. If you would invest  13,076  in Government Street Equity on October 10, 2024 and sell it today you would lose (296.00) from holding Government Street Equity or give up 2.26% of portfolio value over 90 days.

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

NYSE Composite  vs.  Government Street Equity

Pair Trading with NYSE Composite and Government Street

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

The idea behind NYSE Composite and Government Street Equity 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.