Correlation Between NEM and NEO

Can any of the company-specific risk be diversified away by investing in both NEM and NEO 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 NEM and NEO into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between NEM and NEO, you can compare the effects of market volatilities on NEM and NEO 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 NEM with a short position of NEO. Check out your portfolio center. Please also check ongoing floating volatility patterns of NEM and NEO.

Diversification Opportunities for NEM and NEO

0.53

Correlation Coefficient

NEM  NEO

Very weak diversification

The 3 months correlation between NEM and NEO is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding NEM and NEO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NEO and NEM 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 NEM are associated (or correlated) with NEO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NEO has no effect on the direction of NEM i.e., NEM and NEO go up and down completely randomly.

Pair Corralation between NEM and NEO

Assuming the 90 days trading horizon NEM is expected to generate 4.99 times less return on investment than NEO. But when comparing it to its historical volatility, NEM is 1.04 times less risky than NEO. It trades about 0.04 of its potential returns per unit of risk. NEO is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,059  in NEO on January 24, 2024 and sell it today you would earn a total of  837.00  from holding NEO or generate 79.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

NEM  vs.  NEO

NEM

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NEM are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady primary indicators, NEM exhibited solid returns over the last few months and may actually be approaching a breakup point.

NEO

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in NEO are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating basic indicators, NEO exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NEM and NEO

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

The idea behind NEM and NEO 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.

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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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.