Correlation Between NYSE Composite and ProShares Hedge

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

By analyzing existing cross correlation between NYSE Composite and ProShares Hedge Replication, you can compare the effects of market volatilities on NYSE Composite and ProShares Hedge 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 ProShares Hedge. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and ProShares Hedge.

Diversification Opportunities for NYSE Composite and ProShares Hedge

0.95

Correlation Coefficient

NYSE Composite  ProShares Hedge

Almost no diversification

The 3 months correlation between NYSE and ProShares is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and ProShares Hedge Replication in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares Hedge Repl 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 ProShares Hedge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares Hedge Repl has no effect on the direction of NYSE Composite i.e., NYSE Composite and ProShares Hedge go up and down completely randomly.

Pair Corralation between NYSE Composite and ProShares Hedge

Assuming the 90 days trading horizon NYSE Composite is expected to under-perform the ProShares Hedge. In addition to that, NYSE Composite is 2.16 times more volatile than ProShares Hedge Replication. It trades about -0.18 of its total potential returns per unit of risk. ProShares Hedge Replication is currently generating about -0.1 per unit of volatility. If you would invest  4,923  in ProShares Hedge Replication on January 30, 2024 and sell it today you would lose (30.00) from holding ProShares Hedge Replication or give up 0.61% of portfolio value over 90 days.

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

NYSE Composite  vs.  ProShares Hedge Replication

Pair Trading with NYSE Composite and ProShares Hedge

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

The idea behind NYSE Composite and ProShares Hedge Replication 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.