Correlation Between DAX Index and Bank of China

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

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

Diversification Opportunities for DAX Index and Bank of China

0.92

Correlation Coefficient

DAX Index  Bank of China

Almost no diversification

The 3 months correlation between DAX and Bank is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Bank of China in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of China 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 Bank of China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of China has no effect on the direction of DAX Index i.e., DAX Index and Bank of China go up and down completely randomly.

Pair Corralation between DAX Index and Bank of China

Assuming the 90 days trading horizon DAX Index is expected to generate 3.55 times less return on investment than Bank of China. But when comparing it to its historical volatility, DAX Index is 3.57 times less risky than Bank of China. It trades about 0.17 of its potential returns per unit of risk. Bank of China is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  37.00  in Bank of China on December 29, 2024 and sell it today you would earn a total of  18.00  from holding Bank of China or generate 48.65% return on investment over 90 days.

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

DAX Index  vs.  Bank of China

Pair Trading with DAX Index and Bank of China

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

The idea behind DAX Index and Bank of China 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.