Correlation Between Universal Music and NASD Declining

Can any of the company-specific risk be diversified away by investing in both Universal Music and NASD Declining 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 Universal Music and NASD Declining into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Universal Music Group and NASD Declining Stocks, you can compare the effects of market volatilities on Universal Music and NASD Declining 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 Universal Music with a short position of NASD Declining. Check out your portfolio center. Please also check ongoing floating volatility patterns of Universal Music and NASD Declining.

Diversification Opportunities for Universal Music and NASD Declining

-0.06

Correlation Coefficient

Universal Music  NASD Declining

Good diversification

The 3 months correlation between Universal and NASD is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Universal Music Group and NASD Declining Stocks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NASD Declining Stocks and Universal Music 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 Universal Music Group are associated (or correlated) with NASD Declining. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NASD Declining Stocks has no effect on the direction of Universal Music i.e., Universal Music and NASD Declining go up and down completely randomly.

Pair Corralation between Universal Music and NASD Declining

Assuming the 90 days horizon Universal Music is expected to generate 30.95 times less return on investment than NASD Declining. But when comparing it to its historical volatility, Universal Music Group is 12.39 times less risky than NASD Declining. It trades about 0.06 of its potential returns per unit of risk. NASD Declining Stocks is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  290,300  in NASD Declining Stocks on September 15, 2024 and sell it today you would lose (6,300) from holding NASD Declining Stocks or give up 2.17% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Universal Music Group  vs.  NASD Declining Stocks

Pair Trading with Universal Music and NASD Declining

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

The idea behind Universal Music Group and NASD Declining Stocks 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.