Correlation Between NYSE Composite and Meridian Small

Can any of the company-specific risk be diversified away by investing in both NYSE Composite and Meridian 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 Meridian 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 Meridian Small Cap, you can compare the effects of market volatilities on NYSE Composite and Meridian 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 Meridian Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Meridian Small.

Diversification Opportunities for NYSE Composite and Meridian Small

0.59

Correlation Coefficient

NYSE Composite  Meridian Small

Very weak diversification

The 3 months correlation between NYSE and Meridian is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Meridian Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meridian 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 Meridian Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meridian Small Cap has no effect on the direction of NYSE Composite i.e., NYSE Composite and Meridian Small go up and down completely randomly.

Pair Corralation between NYSE Composite and Meridian Small

Assuming the 90 days trading horizon NYSE Composite is expected to generate about the same return on investment as Meridian Small Cap. But, NYSE Composite is 1.59 times less risky than Meridian Small. It trades about 0.06 of its potential returns per unit of risk. Meridian Small Cap is currently generating about 0.04 per unit of risk. If you would invest  980.00  in Meridian Small Cap on October 7, 2024 and sell it today you would earn a total of  185.00  from holding Meridian Small Cap or generate 18.88% 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.  Meridian Small Cap

Pair Trading with NYSE Composite and Meridian Small

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

The idea behind NYSE Composite and Meridian 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.