Correlation Between NYSE Composite and Schwab Large

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

Diversification Opportunities for NYSE Composite and Schwab Large

0.89

Correlation Coefficient

NYSE Composite  Schwab Large

Very poor diversification

The 3 months correlation between NYSE and Schwab is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Schwab Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab 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 Schwab Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Large Cap has no effect on the direction of NYSE Composite i.e., NYSE Composite and Schwab Large go up and down completely randomly.

Pair Corralation between NYSE Composite and Schwab Large

Assuming the 90 days trading horizon NYSE Composite is expected to generate 1.13 times less return on investment than Schwab Large. But when comparing it to its historical volatility, NYSE Composite is 1.01 times less risky than Schwab Large. It trades about 0.09 of its potential returns per unit of risk. Schwab Large Cap Value is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,896  in Schwab Large Cap Value on December 4, 2024 and sell it today you would earn a total of  778.00  from holding Schwab Large Cap Value or generate 41.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.8%
Values	Daily Returns

NYSE Composite  vs.  Schwab Large Cap Value

Pair Trading with NYSE Composite and Schwab Large

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

The idea behind NYSE Composite and Schwab Large Cap Value 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.