Correlation Between DAX Index and Alcoa Corp

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

By analyzing existing cross correlation between DAX Index and Alcoa Corp, you can compare the effects of market volatilities on DAX Index and Alcoa Corp 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 DAX Index with a short position of Alcoa Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of DAX Index and Alcoa Corp.

Diversification Opportunities for DAX Index and Alcoa Corp

-0.04

Correlation Coefficient

DAX Index  Alcoa Corp

Good diversification

The 3 months correlation between DAX and Alcoa is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp and DAX Index 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 DAX Index are associated (or correlated) with Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of DAX Index i.e., DAX Index and Alcoa Corp go up and down completely randomly.

Pair Corralation between DAX Index and Alcoa Corp

Assuming the 90 days trading horizon DAX Index is expected to generate 0.25 times more return on investment than Alcoa Corp. However, DAX Index is 4.03 times less risky than Alcoa Corp. It trades about 0.08 of its potential returns per unit of risk. Alcoa Corp is currently generating about 0.0 per unit of risk. If you would invest  1,510,295  in DAX Index on October 12, 2024 and sell it today you would earn a total of  511,184  from holding DAX Index or generate 33.85% return on investment over 90 days.

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

DAX Index  vs.  Alcoa Corp

Pair Trading with DAX Index and Alcoa Corp

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

The idea behind DAX Index and Alcoa Corp 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..