Correlation Between NYSE Composite and Texas Rare

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

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

Diversification Opportunities for NYSE Composite and Texas Rare

0.03

Correlation Coefficient

NYSE Composite  Texas Rare

Significant diversification

The 3 months correlation between NYSE and Texas is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Texas Rare Earth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Texas Rare Earth 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 Texas Rare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Texas Rare Earth has no effect on the direction of NYSE Composite i.e., NYSE Composite and Texas Rare go up and down completely randomly.

Pair Corralation between NYSE Composite and Texas Rare

Assuming the 90 days trading horizon NYSE Composite is expected to generate 68.38 times less return on investment than Texas Rare. But when comparing it to its historical volatility, NYSE Composite is 9.98 times less risky than Texas Rare. It trades about 0.02 of its potential returns per unit of risk. Texas Rare Earth is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  25.00  in Texas Rare Earth on December 29, 2024 and sell it today you would earn a total of  22.00  from holding Texas Rare Earth or generate 88.0% return on investment over 90 days.

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

NYSE Composite  vs.  Texas Rare Earth

Pair Trading with NYSE Composite and Texas Rare

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

The idea behind NYSE Composite and Texas Rare Earth 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.