Correlation Between Budapest and Tel Aviv

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

By analyzing existing cross correlation between Budapest SE and Tel Aviv 35, you can compare the effects of market volatilities on Budapest and Tel Aviv 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 Tel Aviv. Check out your portfolio center. Please also check ongoing floating volatility patterns of Budapest and Tel Aviv.

Diversification Opportunities for Budapest and Tel Aviv

0.89

Correlation Coefficient

Budapest  Tel Aviv

Very poor diversification

The 3 months correlation between Budapest and Tel is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Budapest SE and Tel Aviv 35 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tel Aviv 35 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 Tel Aviv. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tel Aviv 35 has no effect on the direction of Budapest i.e., Budapest and Tel Aviv go up and down completely randomly.

Pair Corralation between Budapest and Tel Aviv

Assuming the 90 days trading horizon Budapest is expected to generate 1.3 times less return on investment than Tel Aviv. But when comparing it to its historical volatility, Budapest SE is 1.34 times less risky than Tel Aviv. It trades about 0.12 of its potential returns per unit of risk. Tel Aviv 35 is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  201,941  in Tel Aviv 35 on September 1, 2024 and sell it today you would earn a total of  24,108  from holding Tel Aviv 35 or generate 11.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	76.19%
Values	Daily Returns

Budapest SE  vs.  Tel Aviv 35

Pair Trading with Budapest and Tel Aviv

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

The idea behind Budapest SE and Tel Aviv 35 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.

Check out your portfolio center.

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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.