Correlation Between NYSE Composite and Northern Ultra-short

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

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

Diversification Opportunities for NYSE Composite and Northern Ultra-short

0.03

Correlation Coefficient

NYSE Composite  Northern Ultra-short

Significant diversification

The 3 months correlation between NYSE and Northern is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Northern Ultra Short Fixed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Ultra Short 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 Northern Ultra-short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Ultra Short has no effect on the direction of NYSE Composite i.e., NYSE Composite and Northern Ultra-short go up and down completely randomly.

Pair Corralation between NYSE Composite and Northern Ultra-short

Assuming the 90 days trading horizon NYSE Composite is expected to under-perform the Northern Ultra-short. In addition to that, NYSE Composite is 37.48 times more volatile than Northern Ultra Short Fixed. It trades about -0.26 of its total potential returns per unit of risk. Northern Ultra Short Fixed is currently generating about -0.23 per unit of volatility. If you would invest  1,031  in Northern Ultra Short Fixed on October 13, 2024 and sell it today you would lose (1.00) from holding Northern Ultra Short Fixed or give up 0.1% of portfolio value over 90 days.

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

NYSE Composite  vs.  Northern Ultra Short Fixed

Pair Trading with NYSE Composite and Northern Ultra-short

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

The idea behind NYSE Composite and Northern Ultra Short Fixed 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.