Correlation Between NYSE Composite and Europe 30

Can any of the company-specific risk be diversified away by investing in both NYSE Composite and Europe 30 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 Europe 30 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between NYSE Composite and Europe 30 Profund, you can compare the effects of market volatilities on NYSE Composite and Europe 30 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 Europe 30. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and Europe 30.

Diversification Opportunities for NYSE Composite and Europe 30

0.92

Correlation Coefficient

NYSE Composite  Europe 30

Almost no diversification

The 3 months correlation between NYSE and Europe is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and Europe 30 Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Europe 30 Profund 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 Europe 30. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Europe 30 Profund has no effect on the direction of NYSE Composite i.e., NYSE Composite and Europe 30 go up and down completely randomly.

Pair Corralation between NYSE Composite and Europe 30

Assuming the 90 days trading horizon NYSE Composite is expected to under-perform the Europe 30. But the index apears to be less risky and, when comparing its historical volatility, NYSE Composite is 1.09 times less risky than Europe 30. The index trades about -0.06 of its potential returns per unit of risk. The Europe 30 Profund is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  1,560  in Europe 30 Profund on February 4, 2024 and sell it today you would lose (1.00) from holding Europe 30 Profund or give up 0.06% 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.  Europe 30 Profund

Pair Trading with NYSE Composite and Europe 30

The main advantage of trading using opposite NYSE Composite and Europe 30 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NYSE Composite position performs unexpectedly, Europe 30 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 Europe 30 will offset losses from the drop in Europe 30's long position.

The idea behind NYSE Composite and Europe 30 Profund 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.

Check out your portfolio center.

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.