Correlation Between NYSE Composite and FlexShares Quality

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

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

Diversification Opportunities for NYSE Composite and FlexShares Quality

0.92

Correlation Coefficient

NYSE Composite  FlexShares Quality

Almost no diversification

The 3 months correlation between NYSE and FlexShares is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and FlexShares Quality Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FlexShares Quality Large 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 FlexShares Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FlexShares Quality Large has no effect on the direction of NYSE Composite i.e., NYSE Composite and FlexShares Quality go up and down completely randomly.

Pair Corralation between NYSE Composite and FlexShares Quality

Assuming the 90 days trading horizon NYSE Composite is expected to generate 31.56 times less return on investment than FlexShares Quality. But when comparing it to its historical volatility, NYSE Composite is 1.03 times less risky than FlexShares Quality. It trades about 0.01 of its potential returns per unit of risk. FlexShares Quality Large is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  6,673  in FlexShares Quality Large on September 17, 2024 and sell it today you would earn a total of  152.00  from holding FlexShares Quality Large or generate 2.28% return on investment over 90 days.

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

NYSE Composite  vs.  FlexShares Quality Large

Pair Trading with NYSE Composite and FlexShares Quality

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

The idea behind NYSE Composite and FlexShares Quality Large 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.