Correlation Between NYSE Composite and Disciplined Value

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

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

Diversification Opportunities for NYSE Composite and Disciplined Value

0.72

Correlation Coefficient

NYSE Composite  Disciplined Value

Poor diversification

The 3 months correlation between NYSE and Disciplined is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Disciplined Value Series in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Disciplined Value Series 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 Disciplined Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Disciplined Value Series has no effect on the direction of NYSE Composite i.e., NYSE Composite and Disciplined Value go up and down completely randomly.

Pair Corralation between NYSE Composite and Disciplined Value

Assuming the 90 days trading horizon NYSE Composite is expected to generate 0.53 times more return on investment than Disciplined Value. However, NYSE Composite is 1.88 times less risky than Disciplined Value. It trades about -0.02 of its potential returns per unit of risk. Disciplined Value Series is currently generating about -0.11 per unit of risk. If you would invest  2,021,322  in NYSE Composite on December 2, 2024 and sell it today you would lose (18,503) from holding NYSE Composite or give up 0.92% 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.  Disciplined Value Series

Pair Trading with NYSE Composite and Disciplined Value

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

The idea behind NYSE Composite and Disciplined Value Series 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.