Correlation Between Budapest and Swiss Leader

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

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

Diversification Opportunities for Budapest and Swiss Leader

-0.54

Correlation Coefficient

Budapest  Swiss Leader

Excellent diversification

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

Pair Corralation between Budapest and Swiss Leader

Assuming the 90 days trading horizon Budapest SE is expected to generate 0.91 times more return on investment than Swiss Leader. However, Budapest SE is 1.1 times less risky than Swiss Leader. It trades about 0.12 of its potential returns per unit of risk. Swiss Leader Price is currently generating about 0.0 per unit of risk. If you would invest  6,945,884  in Budapest SE on September 1, 2024 and sell it today you would earn a total of  847,737  from holding Budapest SE or generate 12.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	96.92%
Values	Daily Returns

Budapest SE  vs.  Swiss Leader Price

Pair Trading with Budapest and Swiss Leader

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

The idea behind Budapest SE and Swiss Leader Price 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.