Two Equities Correlation Analysis

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

0.96
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Walmart and NYSE is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Walmart and NYSE Composite in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NYSE Composite and Walmart 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 Walmart 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 Walmart i.e., Walmart and NYSE Composite go up and down completely randomly.
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Pair Corralation between Walmart and NYSE Composite

Considering the 90-day investment horizon Walmart is expected to generate 2.94 times less return on investment than NYSE Composite. In addition to that, Walmart is 1.51 times more volatile than NYSE Composite. It trades about 0.08 of its total potential returns per unit of risk. NYSE Composite is currently generating about 0.36 per unit of volatility. If you would invest  1,759,832  in NYSE Composite on December 29, 2023 and sell it today you would earn a total of  71,435  from holding NYSE Composite or generate 4.06% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Walmart  vs.  NYSE Composite

 Performance 
       Timeline  

Walmart and NYSE Composite Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Walmart and NYSE Composite

The main advantage of trading using opposite Walmart and NYSE Composite positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Walmart 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 Walmart 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..

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