Correlation Between Twitter and NZSE

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Can any of the company-specific risk be diversified away by investing in both Twitter and NZSE 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 Twitter and NZSE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Twitter and NZSE, you can compare the effects of market volatilities on Twitter and NZSE 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 Twitter with a short position of NZSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Twitter and NZSE.

Diversification Opportunities for Twitter and NZSE

0.69
  Correlation Coefficient

Poor diversification

The 3 months correlation between Twitter and NZSE is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Twitter and NZSE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NZSE and Twitter 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 Twitter are associated (or correlated) with NZSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NZSE has no effect on the direction of Twitter i.e., Twitter and NZSE go up and down completely randomly.
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Pair Corralation between Twitter and NZSE

Given the investment horizon of 90 days Twitter is expected to generate 2.54 times more return on investment than NZSE. However, Twitter is 2.54 times more volatile than NZSE. It trades about 0.2 of its potential returns per unit of risk. NZSE is currently generating about -0.18 per unit of risk. If you would invest  4,004  in Twitter on June 30, 2022 and sell it today you would earn a total of  321.00  from holding Twitter or generate 8.02% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy95.45%
ValuesDaily Returns

Twitter  vs.  NZSE

 Performance (%) 
       Timeline  

Twitter and NZSE Volatility Contrast

   Predicted Return Density   
       Returns  

Twitter

Pair trading matchups for Twitter

NZSE

Pair trading matchups for NZSE

The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against NZSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. NZSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, NZSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to NZSE.

Pair Trading with Twitter and NZSE

The main advantage of trading using opposite Twitter and NZSE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Twitter position performs unexpectedly, NZSE 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 NZSE will offset losses from the drop in NZSE's long position.
Twitter vs. Tencent Holdings
The idea behind Twitter and NZSE 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against NZSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. NZSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, NZSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to NZSE.
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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.

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