Correlation Between NYSE Composite and JIB

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

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

Diversification Opportunities for NYSE Composite and JIB

0.2

Correlation Coefficient

NYSE Composite  JIB

Modest diversification

The 3 months correlation between NYSE and JIB is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and JIB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on JIB 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 JIB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of JIB has no effect on the direction of NYSE Composite i.e., NYSE Composite and JIB go up and down completely randomly.

Pair Corralation between NYSE Composite and JIB

Assuming the 90 days trading horizon NYSE Composite is expected to generate 2.08 times more return on investment than JIB. However, NYSE Composite is 2.08 times more volatile than JIB. It trades about 0.07 of its potential returns per unit of risk. JIB is currently generating about -0.01 per unit of risk. If you would invest  1,589,536  in NYSE Composite on October 26, 2024 and sell it today you would earn a total of  410,211  from holding NYSE Composite or generate 25.81% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	23.48%
Values	Daily Returns

NYSE Composite  vs.  JIB

Pair Trading with NYSE Composite and JIB

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

The idea behind NYSE Composite and JIB 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.