Correlation Between DAX Index and Hang Seng

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

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

Diversification Opportunities for DAX Index and Hang Seng

0.47

Correlation Coefficient

DAX Index  Hang Seng

Very weak diversification

The 3 months correlation between DAX and Hang is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Hang Seng Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hang Seng 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 Hang Seng. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hang Seng Bank has no effect on the direction of DAX Index i.e., DAX Index and Hang Seng go up and down completely randomly.

Pair Corralation between DAX Index and Hang Seng

Assuming the 90 days trading horizon DAX Index is expected to generate 3.55 times less return on investment than Hang Seng. But when comparing it to its historical volatility, DAX Index is 3.61 times less risky than Hang Seng. It trades about 0.08 of its potential returns per unit of risk. Hang Seng Bank is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  549.00  in Hang Seng Bank on October 12, 2024 and sell it today you would earn a total of  591.00  from holding Hang Seng Bank or generate 107.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.75%
Values	Daily Returns

DAX Index  vs.  Hang Seng Bank

Pair Trading with DAX Index and Hang Seng

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

The idea behind DAX Index and Hang Seng 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.