Correlation Between NYSE Composite and Third Avenue

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

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

Diversification Opportunities for NYSE Composite and Third Avenue

-0.33

Correlation Coefficient

NYSE Composite  Third Avenue

Very good diversification

The 3 months correlation between NYSE and Third is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Third Avenue Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Third Avenue Value 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 Third Avenue. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Third Avenue Value has no effect on the direction of NYSE Composite i.e., NYSE Composite and Third Avenue go up and down completely randomly.

Pair Corralation between NYSE Composite and Third Avenue

Assuming the 90 days trading horizon NYSE Composite is expected to generate 0.75 times more return on investment than Third Avenue. However, NYSE Composite is 1.34 times less risky than Third Avenue. It trades about 0.08 of its potential returns per unit of risk. Third Avenue Value is currently generating about 0.04 per unit of risk. If you would invest  1,549,498  in NYSE Composite on September 4, 2024 and sell it today you would earn a total of  469,083  from holding NYSE Composite or generate 30.27% return on investment over 90 days.

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

NYSE Composite  vs.  Third Avenue Value

Pair Trading with NYSE Composite and Third Avenue

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

The idea behind NYSE Composite and Third Avenue 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.