Correlation Between IBEX 35 and China Securities

Can any of the company-specific risk be diversified away by investing in both IBEX 35 and China Securities 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 IBEX 35 and China Securities into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between IBEX 35 Index and China Securities 800, you can compare the effects of market volatilities on IBEX 35 and China Securities 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 IBEX 35 with a short position of China Securities. Check out your portfolio center. Please also check ongoing floating volatility patterns of IBEX 35 and China Securities.

Diversification Opportunities for IBEX 35 and China Securities

0.3

Correlation Coefficient

IBEX 35  China Securities

Weak diversification

The 3 months correlation between IBEX and China is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding IBEX 35 Index and China Securities 800 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Securities 800 and IBEX 35 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 IBEX 35 Index are associated (or correlated) with China Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Securities 800 has no effect on the direction of IBEX 35 i.e., IBEX 35 and China Securities go up and down completely randomly.

Pair Corralation between IBEX 35 and China Securities

Assuming the 90 days trading horizon IBEX 35 is expected to generate 12.19 times less return on investment than China Securities. But when comparing it to its historical volatility, IBEX 35 Index is 2.93 times less risky than China Securities. It trades about 0.03 of its potential returns per unit of risk. China Securities 800 is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  353,107  in China Securities 800 on August 30, 2024 and sell it today you would earn a total of  68,474  from holding China Securities 800 or generate 19.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	90.63%
Values	Daily Returns

IBEX 35 Index  vs.  China Securities 800

Pair Trading with IBEX 35 and China Securities

The main advantage of trading using opposite IBEX 35 and China Securities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IBEX 35 position performs unexpectedly, China Securities 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 China Securities will offset losses from the drop in China Securities' long position.

The idea behind IBEX 35 Index and China Securities 800 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .