Two Equities Correlation Analysis

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

Diversification Opportunities for Clear Media and NYSE Composite

Pair Corralation between Clear Media and NYSE Composite

Clear Media Limited  vs.  NYSE Composite

Pair Trading with Clear Media and NYSE Composite

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