Correlation Between ASX and London Stock

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

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

Diversification Opportunities for ASX and London Stock

-0.11

Correlation Coefficient

ASX  London Stock

Good diversification

The 3 months correlation between ASX and London is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding ASX Limited and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange and ASX 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 ASX Limited are associated (or correlated) with London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of ASX i.e., ASX and London Stock go up and down completely randomly.

Pair Corralation between ASX and London Stock

Assuming the 90 days horizon ASX Limited is expected to generate 0.69 times more return on investment than London Stock. However, ASX Limited is 1.44 times less risky than London Stock. It trades about 0.06 of its potential returns per unit of risk. London Stock Exchange is currently generating about 0.01 per unit of risk. If you would invest  3,966  in ASX Limited on December 19, 2024 and sell it today you would earn a total of  184.00  from holding ASX Limited or generate 4.64% return on investment over 90 days.

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

ASX Limited  vs.  London Stock Exchange

ASX Limited

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in ASX Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, ASX is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

London Stock Exchange

Risk-Adjusted Performance

Very Weak

Over the last 90 days London Stock Exchange has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, London Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with ASX and London Stock

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

The idea behind ASX Limited and London Stock Exchange 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.