Correlation Between Daewoo Engineering and Kosdaq Composite

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

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

Diversification Opportunities for Daewoo Engineering and Kosdaq Composite

0.54

Correlation Coefficient

Daewoo Engineering  Kosdaq Composite

Very weak diversification

The 3 months correlation between Daewoo and Kosdaq is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Daewoo Engineering Constructio and Kosdaq Composite Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kosdaq Composite Index and Daewoo Engineering 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 Daewoo Engineering Construction are associated (or correlated) with Kosdaq Composite. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kosdaq Composite Index has no effect on the direction of Daewoo Engineering i.e., Daewoo Engineering and Kosdaq Composite go up and down completely randomly.

Pair Corralation between Daewoo Engineering and Kosdaq Composite

Assuming the 90 days trading horizon Daewoo Engineering Construction is expected to generate 1.24 times more return on investment than Kosdaq Composite. However, Daewoo Engineering is 1.24 times more volatile than Kosdaq Composite Index. It trades about -0.07 of its potential returns per unit of risk. Kosdaq Composite Index is currently generating about -0.12 per unit of risk. If you would invest  400,000  in Daewoo Engineering Construction on September 3, 2024 and sell it today you would lose (31,000) from holding Daewoo Engineering Construction or give up 7.75% of portfolio value over 90 days.

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

Daewoo Engineering Constructio  vs.  Kosdaq Composite Index

Pair Trading with Daewoo Engineering and Kosdaq Composite

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

The idea behind Daewoo Engineering Construction and Kosdaq Composite Index 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.