Correlation Between NYSE Composite and Invesco Agriculture

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

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

Diversification Opportunities for NYSE Composite and Invesco Agriculture

0.2

Correlation Coefficient

NYSE Composite  Invesco Agriculture

Modest diversification

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

Pair Corralation between NYSE Composite and Invesco Agriculture

Assuming the 90 days trading horizon NYSE Composite is expected to under-perform the Invesco Agriculture. But the index apears to be less risky and, when comparing its historical volatility, NYSE Composite is 1.04 times less risky than Invesco Agriculture. The index trades about -0.36 of its potential returns per unit of risk. The Invesco Agriculture Commodity is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  3,837  in Invesco Agriculture Commodity on September 23, 2024 and sell it today you would earn a total of  143.00  from holding Invesco Agriculture Commodity or generate 3.73% return on investment over 90 days.

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

NYSE Composite  vs.  Invesco Agriculture Commodity

Pair Trading with NYSE Composite and Invesco Agriculture

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

The idea behind NYSE Composite and Invesco Agriculture Commodity 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.