Two Equities Correlation Analysis

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Can any of the company-specific risk be diversified away by investing in both Vanguard Total 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 Vanguard Total 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 Vanguard Total and NYSE Composite

0.79
  Correlation Coefficient

Poor diversification

The 3 months correlation between Vanguard and NYSE is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding VANGUARD TOTAL STOCK and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Vanguard Total 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 Vanguard Total Stock 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 Vanguard Total i.e., Vanguard Total and NYSE Composite go up and down completely randomly.
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Pair Corralation between Vanguard Total and NYSE Composite

Assuming the 90 days horizon Vanguard Total Stock is expected to generate 1.16 times more return on investment than NYSE Composite. However, Vanguard Total is 1.16 times more volatile than NYSE Composite. It trades about 0.04 of its potential returns per unit of risk. NYSE Composite is currently generating about 0.02 per unit of risk. If you would invest  19,858  in Vanguard Total Stock on December 29, 2023 and sell it today you would earn a total of  3,892  from holding Vanguard Total Stock or generate 19.6% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

VANGUARD TOTAL STOCK  vs.  NYSE Composite

 Performance 
       Timeline  

Vanguard Total and NYSE Composite Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Total and NYSE Composite

The main advantage of trading using opposite Vanguard Total and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Total 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 Vanguard Total Stock 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.

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