Correlation Between Cboe UK and WisdomTree

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

By analyzing existing cross correlation between Cboe UK Consumer and WisdomTree SP 500, you can compare the effects of market volatilities on Cboe UK and WisdomTree 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 Cboe UK with a short position of WisdomTree. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cboe UK and WisdomTree.

Diversification Opportunities for Cboe UK and WisdomTree

0.83

Correlation Coefficient

Cboe UK  WisdomTree

Very poor diversification

The 3 months correlation between Cboe and WisdomTree is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Cboe UK Consumer and WisdomTree SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree SP 500 and Cboe UK 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 Cboe UK Consumer are associated (or correlated) with WisdomTree. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree SP 500 has no effect on the direction of Cboe UK i.e., Cboe UK and WisdomTree go up and down completely randomly.

Pair Corralation between Cboe UK and WisdomTree

Assuming the 90 days trading horizon Cboe UK is expected to generate 2.0 times less return on investment than WisdomTree. But when comparing it to its historical volatility, Cboe UK Consumer is 2.21 times less risky than WisdomTree. It trades about 0.26 of its potential returns per unit of risk. WisdomTree SP 500 is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  9,213  in WisdomTree SP 500 on September 11, 2024 and sell it today you would earn a total of  3,154  from holding WisdomTree SP 500 or generate 34.23% return on investment over 90 days.

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

Cboe UK Consumer  vs.  WisdomTree SP 500

Pair Trading with Cboe UK and WisdomTree

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

The idea behind Cboe UK Consumer and WisdomTree SP 500 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.