Two Equities Correlation Analysis

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Can any of the company-specific risk be diversified away by investing in both Nio 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 Nio and NYSE Composite into the same portfolio, which is an essential part of the fundamental portfolio management process.
This model provides you with a quick lookup of cross correlation between two equities. Please specify two instruments to run the correlation.

Diversification Opportunities for Nio and NYSE Composite

-0.66
  Correlation Coefficient

Excellent diversification

The 3 months correlation between Nio and NYSE is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Nio Class A and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Nio 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 Nio Class A are associated (or correlated) with NYSE Composite. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NYSE Composite has no effect on the direction of Nio i.e., Nio and NYSE Composite go up and down completely randomly.
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Pair Corralation between Nio and NYSE Composite

Considering the 90-day investment horizon Nio Class A is expected to under-perform the NYSE Composite. In addition to that, Nio is 4.59 times more volatile than NYSE Composite. It trades about -0.04 of its total potential returns per unit of risk. NYSE Composite is currently generating about 0.02 per unit of volatility. If you would invest  1,668,995  in NYSE Composite on December 29, 2023 and sell it today you would earn a total of  156,529  from holding NYSE Composite or generate 9.38% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Nio Class A  vs.  NYSE Composite

 Performance 
       Timeline  

Nio and NYSE Composite Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Nio and NYSE Composite

The main advantage of trading using opposite Nio and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nio 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 Nio Class A 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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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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.

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