Correlation Between DIA and NXS
Can any of the company-specific risk be diversified away by investing in both DIA and NXS 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 DIA and NXS into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DIA and NXS, you can compare the effects of market volatilities on DIA and NXS 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 DIA with a short position of NXS. Check out your portfolio center. Please also check ongoing floating volatility patterns of DIA and NXS.
Diversification Opportunities for DIA and NXS
Very weak diversification
The 3 months correlation between DIA and NXS is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding DIA and NXS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NXS and DIA 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 DIA are associated (or correlated) with NXS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NXS has no effect on the direction of DIA i.e., DIA and NXS go up and down completely randomly.
Pair Corralation between DIA and NXS
Assuming the 90 days trading horizon DIA is expected to generate 1.63 times less return on investment than NXS. But when comparing it to its historical volatility, DIA is 2.07 times less risky than NXS. It trades about 0.06 of its potential returns per unit of risk. NXS is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 6.37 in NXS on August 24, 2024 and sell it today you would earn a total of 17.63 from holding NXS or generate 276.77% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 57.42% |
| Values | Daily Returns |
DIA vs. NXS
Performance |
| Timeline |
| DIA |
| NXS |
DIA and NXS Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with DIA and NXS
The main advantage of trading using opposite DIA and NXS positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DIA position performs unexpectedly, NXS 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 NXS will offset losses from the drop in NXS's long position.The idea behind DIA and NXS 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.
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