Correlation Between DAX Index and Adidas AG

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

By analyzing existing cross correlation between DAX Index and adidas AG, you can compare the effects of market volatilities on DAX Index and Adidas AG 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 Adidas AG. Check out your portfolio center. Please also check ongoing floating volatility patterns of DAX Index and Adidas AG.

Diversification Opportunities for DAX Index and Adidas AG

0.6

Correlation Coefficient

DAX Index  Adidas AG

Poor diversification

The 3 months correlation between DAX and Adidas is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and adidas AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on adidas AG 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 Adidas AG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of adidas AG has no effect on the direction of DAX Index i.e., DAX Index and Adidas AG go up and down completely randomly.

Pair Corralation between DAX Index and Adidas AG

Assuming the 90 days trading horizon DAX Index is expected to generate 1.46 times less return on investment than Adidas AG. But when comparing it to its historical volatility, DAX Index is 2.95 times less risky than Adidas AG. It trades about 0.12 of its potential returns per unit of risk. adidas AG is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  8,472  in adidas AG on September 26, 2024 and sell it today you would earn a total of  3,228  from holding adidas AG or generate 38.1% return on investment over 90 days.

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

DAX Index  vs.  adidas AG

Pair Trading with DAX Index and Adidas AG

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

The idea behind DAX Index and adidas AG 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.