Correlation Between NYSE Composite and Pax Large

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

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

Diversification Opportunities for NYSE Composite and Pax Large

0.78

Correlation Coefficient

NYSE Composite  Pax Large

Poor diversification

The 3 months correlation between NYSE and Pax is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Pax Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pax Large 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 Pax Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pax Large Cap has no effect on the direction of NYSE Composite i.e., NYSE Composite and Pax Large go up and down completely randomly.

Pair Corralation between NYSE Composite and Pax Large

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.25 times less return on investment than Pax Large. But when comparing it to its historical volatility, NYSE Composite is 1.28 times less risky than Pax Large. It trades about 0.08 of its potential returns per unit of risk. Pax Large Cap is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,516  in Pax Large Cap on September 14, 2024 and sell it today you would earn a total of  50.00  from holding Pax Large Cap or generate 3.3% return on investment over 90 days.

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

NYSE Composite  vs.  Pax Large Cap

Pair Trading with NYSE Composite and Pax Large

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

The idea behind NYSE Composite and Pax Large 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.