Correlation Between DAX Index and LEGAL GENERAL

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

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

Diversification Opportunities for DAX Index and LEGAL GENERAL

0.74

Correlation Coefficient

DAX Index  LEGAL GENERAL

Poor diversification

The 3 months correlation between DAX and LEGAL is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and LEGAL GENERAL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LEGAL GENERAL 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 LEGAL GENERAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LEGAL GENERAL has no effect on the direction of DAX Index i.e., DAX Index and LEGAL GENERAL go up and down completely randomly.

Pair Corralation between DAX Index and LEGAL GENERAL

Assuming the 90 days trading horizon DAX Index is expected to generate 0.55 times more return on investment than LEGAL GENERAL. However, DAX Index is 1.83 times less risky than LEGAL GENERAL. It trades about 0.09 of its potential returns per unit of risk. LEGAL GENERAL is currently generating about 0.01 per unit of risk. If you would invest  1,406,926  in DAX Index on September 23, 2024 and sell it today you would earn a total of  581,549  from holding DAX Index or generate 41.33% 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.  LEGAL GENERAL

Pair Trading with DAX Index and LEGAL GENERAL

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

The idea behind DAX Index and LEGAL GENERAL 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.