Correlation Between NAS and EM
Can any of the company-specific risk be diversified away by investing in both NAS and EM 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 NAS and EM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NAS and EM, you can compare the effects of market volatilities on NAS and EM 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 NAS with a short position of EM. Check out your portfolio center. Please also check ongoing floating volatility patterns of NAS and EM.
Diversification Opportunities for NAS and EM
Pay attention - limited upside
The 3 months correlation between NAS and EM is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding NAS and EM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EM and NAS 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 NAS are associated (or correlated) with EM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EM has no effect on the direction of NAS i.e., NAS and EM go up and down completely randomly.
Pair Corralation between NAS and EM
Assuming the 90 days trading horizon NAS is expected to generate 0.87 times more return on investment than EM. However, NAS is 1.15 times less risky than EM. It trades about -0.01 of its potential returns per unit of risk. EM is currently generating about -0.05 per unit of risk. If you would invest 0.94 in NAS on August 31, 2024 and sell it today you would lose (0.52) from holding NAS or give up 55.91% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Flat |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
NAS vs. EM
Performance |
| Timeline |
| NAS |
| EM |
NAS and EM Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NAS and EM
The main advantage of trading using opposite NAS and EM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NAS position performs unexpectedly, EM 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 EM will offset losses from the drop in EM's long position.The idea behind NAS and EM 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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