Correlation Between DAX Index and China Construction

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

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

Diversification Opportunities for DAX Index and China Construction

0.77

Correlation Coefficient

DAX Index  China Construction

Poor diversification

The 3 months correlation between DAX and China is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank 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 China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of DAX Index i.e., DAX Index and China Construction go up and down completely randomly.

Pair Corralation between DAX Index and China Construction

Assuming the 90 days trading horizon DAX Index is expected to generate 3.23 times less return on investment than China Construction. But when comparing it to its historical volatility, DAX Index is 3.82 times less risky than China Construction. It trades about 0.17 of its potential returns per unit of risk. China Construction Bank is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  57.00  in China Construction Bank on December 29, 2024 and sell it today you would earn a total of  24.00  from holding China Construction Bank or generate 42.11% 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.  China Construction Bank

Pair Trading with DAX Index and China Construction

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

The idea behind DAX Index and China Construction Bank 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.