Correlation Between IShares Nikkei and IShares VII

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

By analyzing existing cross correlation between iShares Nikkei 225 and iShares VII PLC, you can compare the effects of market volatilities on IShares Nikkei and IShares VII 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 IShares Nikkei with a short position of IShares VII. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Nikkei and IShares VII.

Diversification Opportunities for IShares Nikkei and IShares VII

0.98

Correlation Coefficient

IShares Nikkei  IShares VII

Almost no diversification

The 3 months correlation between IShares and IShares is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding iShares Nikkei 225 and iShares VII PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares VII PLC and IShares Nikkei 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 iShares Nikkei 225 are associated (or correlated) with IShares VII. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares VII PLC has no effect on the direction of IShares Nikkei i.e., IShares Nikkei and IShares VII go up and down completely randomly.

Pair Corralation between IShares Nikkei and IShares VII

Assuming the 90 days trading horizon iShares Nikkei 225 is expected to generate about the same return on investment as iShares VII PLC. However, IShares Nikkei is 1.05 times more volatile than iShares VII PLC. It trades about 0.09 of its potential returns per unit of risk. iShares VII PLC is currently producing about 0.09 per unit of risk. If you would invest  23,270  in iShares VII PLC on September 13, 2024 and sell it today you would earn a total of  1,460  from holding iShares VII PLC or generate 6.27% return on investment over 90 days.

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

iShares Nikkei 225  vs.  iShares VII PLC

iShares Nikkei 225

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Nikkei 225 are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, IShares Nikkei may actually be approaching a critical reversion point that can send shares even higher in January 2025.

iShares VII PLC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares VII PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, IShares VII may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares Nikkei and IShares VII

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

The idea behind iShares Nikkei 225 and iShares VII PLC 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.