Correlation Between DAX Index and American Electric

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

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

Diversification Opportunities for DAX Index and American Electric

-0.1

Correlation Coefficient

DAX Index  American Electric

Good diversification

The 3 months correlation between DAX and American is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power 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 American Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of DAX Index i.e., DAX Index and American Electric go up and down completely randomly.

Pair Corralation between DAX Index and American Electric

Assuming the 90 days trading horizon DAX Index is expected to under-perform the American Electric. But the index apears to be less risky and, when comparing its historical volatility, DAX Index is 1.9 times less risky than American Electric. The index trades about -0.28 of its potential returns per unit of risk. The American Electric Power is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  9,050  in American Electric Power on October 8, 2024 and sell it today you would lose (100.00) from holding American Electric Power or give up 1.1% of portfolio value over 90 days.

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

DAX Index  vs.  American Electric Power

Pair Trading with DAX Index and American Electric

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

The idea behind DAX Index and American Electric Power 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.