Correlation Between DAX Index and IncomeShares Microsoft

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

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

Diversification Opportunities for DAX Index and IncomeShares Microsoft

0.75

Correlation Coefficient

DAX Index  IncomeShares Microsoft

Poor diversification

The 3 months correlation between DAX and IncomeShares is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and IncomeShares Microsoft Options in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IncomeShares Microsoft 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 IncomeShares Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IncomeShares Microsoft has no effect on the direction of DAX Index i.e., DAX Index and IncomeShares Microsoft go up and down completely randomly.

Pair Corralation between DAX Index and IncomeShares Microsoft

Assuming the 90 days trading horizon DAX Index is expected to generate 0.85 times more return on investment than IncomeShares Microsoft. However, DAX Index is 1.18 times less risky than IncomeShares Microsoft. It trades about 0.11 of its potential returns per unit of risk. IncomeShares Microsoft Options is currently generating about 0.08 per unit of risk. If you would invest  1,546,001  in DAX Index on October 5, 2024 and sell it today you would earn a total of  444,607  from holding DAX Index or generate 28.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	9.94%
Values	Daily Returns

DAX Index  vs.  IncomeShares Microsoft Options

Pair Trading with DAX Index and IncomeShares Microsoft

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

The idea behind DAX Index and IncomeShares Microsoft Options 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.