Correlation Between NYSE Composite and Government Securities

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

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

Diversification Opportunities for NYSE Composite and Government Securities

-0.07

Correlation Coefficient

NYSE Composite  Government Securities

Good diversification

The 3 months correlation between NYSE and Government is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Government Securities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Securities 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 Government Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Securities has no effect on the direction of NYSE Composite i.e., NYSE Composite and Government Securities go up and down completely randomly.

Pair Corralation between NYSE Composite and Government Securities

Assuming the 90 days trading horizon NYSE Composite is expected to generate 2.07 times more return on investment than Government Securities. However, NYSE Composite is 2.07 times more volatile than Government Securities Fund. It trades about 0.07 of its potential returns per unit of risk. Government Securities Fund is currently generating about 0.03 per unit of risk. If you would invest  1,515,445  in NYSE Composite on September 24, 2024 and sell it today you would earn a total of  396,499  from holding NYSE Composite or generate 26.16% 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.  Government Securities Fund

Pair Trading with NYSE Composite and Government Securities

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

The idea behind NYSE Composite and Government Securities Fund 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.