Correlation Between SP 500 and Nasdaq

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Can any of the company-specific risk be diversified away by investing in both SP 500 and Nasdaq 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 SP 500 and Nasdaq into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SP 500 ETF and Nasdaq, you can compare the effects of market volatilities on SP 500 and Nasdaq 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 SP 500 with a short position of Nasdaq. Check out your portfolio center. Please also check ongoing floating volatility patterns of SP 500 and Nasdaq.

Diversification Opportunities for SP 500 and Nasdaq

0.95
  Correlation Coefficient

Almost no diversification

The 3 months correlation between SP 500 and Nasdaq is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding SP 500 ETF and Nasdaq in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq and SP 500 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 SP 500 ETF are associated (or correlated) with Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq has no effect on the direction of SP 500 i.e., SP 500 and Nasdaq go up and down completely randomly.
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Pair Corralation between SP 500 and Nasdaq

Considering the 90-day investment horizon SP 500 is expected to generate 1.48 times less return on investment than Nasdaq. But when comparing it to its historical volatility, SP 500 ETF is 1.33 times less risky than Nasdaq. It trades about 0.3 of its potential returns per unit of risk. Nasdaq is currently generating about 0.33 of returns per unit of risk over similar time horizon. If you would invest  1,137,260  in Nasdaq on May 10, 2022 and sell it today you would earn a total of  127,186  from holding Nasdaq or generate 11.18% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

SP 500 ETF  vs.  Nasdaq

 Performance (%) 
       Timeline  

SP 500 and Nasdaq Volatility Contrast

   Predicted Return Density   
       Returns  

SP 500 ETF

Pair trading matchups for SP 500

Canadian National vs. SP 500
Ubiquiti Networks vs. SP 500
Amazon vs. SP 500
Ultralife Corp vs. SP 500
Fidelity Select vs. SP 500
Agnico-Eagle Mines vs. SP 500
Alphabet vs. SP 500
Exxon vs. SP 500
Salesforce vs. SP 500
Hyliion Hldg vs. SP 500
Tesla vs. SP 500
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 SP 500 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. SP 500'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, SP 500'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 SP 500 ETF.

Nasdaq

Pair trading matchups for Nasdaq

Amazon vs. Nasdaq
Agnico-Eagle Mines vs. Nasdaq
Hyliion Hldg vs. Nasdaq
Coca Cola vs. Nasdaq
Blink Charging vs. Nasdaq
Otp Bank vs. Nasdaq
Enbridge vs. Nasdaq
Shopify vs. Nasdaq
Alphabet vs. Nasdaq
Salesforce vs. Nasdaq
Ultralife Corp vs. Nasdaq
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 Nasdaq 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. Nasdaq'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, Nasdaq'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 Nasdaq.

Pair Trading with SP 500 and Nasdaq

The main advantage of trading using opposite SP 500 and Nasdaq positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SP 500 position performs unexpectedly, Nasdaq 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 Nasdaq will offset losses from the drop in Nasdaq's long position.

SP 500 ETF

Pair trading matchups for SP 500

Microsoft Corp vs. SP 500
Alphabet vs. SP 500
Exxon vs. SP 500
Otp Bank vs. SP 500
Coca Cola vs. SP 500
Salesforce vs. SP 500
Hyliion Hldg vs. SP 500
Canadian National vs. SP 500
Enbridge vs. SP 500
Blink Charging vs. SP 500
Shopify vs. SP 500
Amazon vs. SP 500
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 SP 500 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. SP 500'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, SP 500'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 SP 500 ETF.
The idea behind SP 500 ETF and Nasdaq 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.

Nasdaq

Pair trading matchups for Nasdaq

Ubiquiti Networks vs. Nasdaq
Agnico-Eagle Mines vs. Nasdaq
Alphabet vs. Nasdaq
Hyliion Hldg vs. Nasdaq
Amazon vs. Nasdaq
Blink Charging vs. Nasdaq
Canadian National vs. Nasdaq
Enbridge vs. Nasdaq
Exxon vs. Nasdaq
Coca Cola vs. Nasdaq
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 Nasdaq 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. Nasdaq'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, Nasdaq'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 Nasdaq.
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 Probability Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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