Correlation Between DAX Index and Source Markets

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

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

Diversification Opportunities for DAX Index and Source Markets

-0.38

Correlation Coefficient

DAX Index  Source Markets

Very good diversification

The 3 months correlation between DAX and Source is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Source Markets plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source Markets plc 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 Source Markets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source Markets plc has no effect on the direction of DAX Index i.e., DAX Index and Source Markets go up and down completely randomly.

Pair Corralation between DAX Index and Source Markets

Assuming the 90 days trading horizon DAX Index is expected to generate 0.91 times more return on investment than Source Markets. However, DAX Index is 1.1 times less risky than Source Markets. It trades about 0.06 of its potential returns per unit of risk. Source Markets plc is currently generating about -0.17 per unit of risk. If you would invest  1,932,493  in DAX Index on September 28, 2024 and sell it today you would earn a total of  52,384  from holding DAX Index or generate 2.71% return on investment over 90 days.

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

DAX Index  vs.  Source Markets plc

Pair Trading with DAX Index and Source Markets

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

The idea behind DAX Index and Source Markets plc 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.

Check out your portfolio center.

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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.