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 Technology 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

0.98
  Correlation Coefficient

Almost no diversification

The 3 months correlation between SP 500 and Nasdaq is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding SP 500 Technology 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 Technology 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 Technology is expected to generate 0.84 times more return on investment than Nasdaq. However, SP 500 Technology is 1.19 times less risky than Nasdaq. It trades about -0.09 of its potential returns per unit of risk. Nasdaq is currently generating about -0.08 per unit of risk. If you would invest  17,496  in SP 500 Technology on March 28, 2022 and sell it today you would lose (4,151)  from holding SP 500 Technology or give up 23.73% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

SP 500 Technology  vs.  Nasdaq

 Performance (%) 
      Timeline 

SP 500 and Nasdaq Volatility Contrast

 Predicted Return Density 
      Returns 

SP 500 Technology

Pair trading matchups for SP 500

SP 500 vs. SP 500
Principal Financial vs. SP 500
GM vs. SP 500
Nextera Energy vs. SP 500
Walker Dunlop vs. SP 500
IpathB SP vs. SP 500
Ipath SP vs. SP 500
T Rowe vs. SP 500
Twitter 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 Technology.

Nasdaq

Pair trading matchups for Nasdaq

IpathB SP vs. Nasdaq
Ipath SP vs. Nasdaq
Citigroup vs. Nasdaq
Microsoft Corp vs. Nasdaq
Nextera Energy vs. Nasdaq
T Rowe vs. Nasdaq
GM vs. Nasdaq
Twitter vs. Nasdaq
Walker Dunlop 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 Technology

Pair trading matchups for SP 500

Ipath SP vs. SP 500
Microsoft Corp vs. SP 500
T Rowe vs. SP 500
IpathB SP vs. SP 500
T Rowe vs. SP 500
SP 500 vs. SP 500
Twitter vs. SP 500
T Rowe vs. SP 500
Citigroup vs. SP 500
GM vs. SP 500
Principal Financial 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 Technology.
The idea behind SP 500 Technology 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

Nextera Energy vs. Nasdaq
Microsoft Corp vs. Nasdaq
Meta Platforms vs. Nasdaq
Principal Financial vs. Nasdaq
T Rowe vs. Nasdaq
SP 500 vs. Nasdaq
Walker Dunlop vs. Nasdaq
Visa vs. Nasdaq
IpathB SP vs. Nasdaq
GM vs. Nasdaq
T Rowe 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.

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