Correlation Between NYSE Composite and Ultra Fund

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

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

Diversification Opportunities for NYSE Composite and Ultra Fund

0.63

Correlation Coefficient

NYSE Composite  Ultra Fund

Poor diversification

The 3 months correlation between NYSE and Ultra is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Ultra Fund I in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra Fund I 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 Ultra Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra Fund I has no effect on the direction of NYSE Composite i.e., NYSE Composite and Ultra Fund go up and down completely randomly.

Pair Corralation between NYSE Composite and Ultra Fund

Assuming the 90 days trading horizon NYSE Composite is expected to generate 2.41 times less return on investment than Ultra Fund. But when comparing it to its historical volatility, NYSE Composite is 1.54 times less risky than Ultra Fund. It trades about 0.07 of its potential returns per unit of risk. Ultra Fund I is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  5,770  in Ultra Fund I on September 23, 2024 and sell it today you would earn a total of  4,341  from holding Ultra Fund I or generate 75.23% 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.  Ultra Fund I

Pair Trading with NYSE Composite and Ultra Fund

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

The idea behind NYSE Composite and Ultra Fund I 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.