Correlation Between NMC and SYS
Can any of the company-specific risk be diversified away by investing in both NMC and SYS 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 NMC and SYS into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NMC and SYS, you can compare the effects of market volatilities on NMC and SYS 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 NMC with a short position of SYS. Check out your portfolio center. Please also check ongoing floating volatility patterns of NMC and SYS.
Diversification Opportunities for NMC and SYS
Poor diversification
The 3 months correlation between NMC and SYS is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding NMC and SYS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SYS and NMC 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 NMC are associated (or correlated) with SYS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SYS has no effect on the direction of NMC i.e., NMC and SYS go up and down completely randomly.
Pair Corralation between NMC and SYS
Assuming the 90 days trading horizon NMC is expected to generate 1.13 times less return on investment than SYS. But when comparing it to its historical volatility, NMC is 1.36 times less risky than SYS. It trades about 0.05 of its potential returns per unit of risk. SYS is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 12.00 in SYS on September 3, 2024 and sell it today you would earn a total of 2.00 from holding SYS or generate 16.67% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
NMC vs. SYS
Performance |
| Timeline |
| NMC |
| SYS |
NMC and SYS Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NMC and SYS
The main advantage of trading using opposite NMC and SYS positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NMC position performs unexpectedly, SYS 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 SYS will offset losses from the drop in SYS's long position.The idea behind NMC and SYS 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 Commodity Directory module to find actively traded commodities issued by global exchanges.
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