Correlation Between DAX Index and BP PLC

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

By analyzing existing cross correlation between DAX Index and BP PLC DZ1, you can compare the effects of market volatilities on DAX Index and BP PLC 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 BP PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of DAX Index and BP PLC.

Diversification Opportunities for DAX Index and BP PLC

0.35

Correlation Coefficient

DAX Index  BP PLC

Weak diversification

The 3 months correlation between DAX and BPE is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and BP PLC DZ1 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP PLC DZ1 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 BP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP PLC DZ1 has no effect on the direction of DAX Index i.e., DAX Index and BP PLC go up and down completely randomly.

Pair Corralation between DAX Index and BP PLC

Assuming the 90 days trading horizon DAX Index is expected to generate 0.29 times more return on investment than BP PLC. However, DAX Index is 3.5 times less risky than BP PLC. It trades about 0.16 of its potential returns per unit of risk. BP PLC DZ1 is currently generating about 0.03 per unit of risk. If you would invest  1,946,119  in DAX Index on October 20, 2024 and sell it today you would earn a total of  144,220  from holding DAX Index or generate 7.41% return on investment over 90 days.

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

DAX Index  vs.  BP PLC DZ1

Pair Trading with DAX Index and BP PLC

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

The idea behind DAX Index and BP PLC DZ1 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.