Correlation Between NYSE Composite and Red Pine

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

By analyzing existing cross correlation between NYSE Composite and Red Pine Exploration, you can compare the effects of market volatilities on NYSE Composite and Red Pine 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 NYSE Composite with a short position of Red Pine. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Red Pine.

Diversification Opportunities for NYSE Composite and Red Pine

0.82

Correlation Coefficient

NYSE Composite  Red Pine

Very poor diversification

The 3 months correlation between NYSE and Red is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Red Pine Exploration in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Red Pine Exploration and NYSE Composite 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 NYSE Composite are associated (or correlated) with Red Pine. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Red Pine Exploration has no effect on the direction of NYSE Composite i.e., NYSE Composite and Red Pine go up and down completely randomly.

Pair Corralation between NYSE Composite and Red Pine

Assuming the 90 days trading horizon NYSE Composite is expected to generate 3.66 times less return on investment than Red Pine. But when comparing it to its historical volatility, NYSE Composite is 8.45 times less risky than Red Pine. It trades about 0.22 of its potential returns per unit of risk. Red Pine Exploration is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  8.37  in Red Pine Exploration on July 2, 2024 and sell it today you would earn a total of  0.63  from holding Red Pine Exploration or generate 7.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

NYSE Composite  vs.  Red Pine Exploration

Pair Trading with NYSE Composite and Red Pine

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

The idea behind NYSE Composite and Red Pine Exploration 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.