Correlation Between NYSE Composite and Vanguard Intermediate-ter

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

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

Diversification Opportunities for NYSE Composite and Vanguard Intermediate-ter

0.05

Correlation Coefficient

NYSE Composite  Vanguard Intermediate-ter

Significant diversification

The 3 months correlation between NYSE and Vanguard is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Vanguard Intermediate Term Gov in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Intermediate-ter 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 Vanguard Intermediate-ter. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Intermediate-ter has no effect on the direction of NYSE Composite i.e., NYSE Composite and Vanguard Intermediate-ter go up and down completely randomly.

Pair Corralation between NYSE Composite and Vanguard Intermediate-ter

Assuming the 90 days trading horizon NYSE Composite is expected to generate 2.34 times less return on investment than Vanguard Intermediate-ter. In addition to that, NYSE Composite is 3.03 times more volatile than Vanguard Intermediate Term Government. It trades about 0.02 of its total potential returns per unit of risk. Vanguard Intermediate Term Government is currently generating about 0.17 per unit of volatility. If you would invest  1,948  in Vanguard Intermediate Term Government on December 30, 2024 and sell it today you would earn a total of  55.00  from holding Vanguard Intermediate Term Government or generate 2.82% 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.  Vanguard Intermediate Term Gov

Pair Trading with NYSE Composite and Vanguard Intermediate-ter

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

The idea behind NYSE Composite and Vanguard Intermediate Term Government 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.