Correlation Between IBEX 35 and PSI 20

Can any of the company-specific risk be diversified away by investing in both IBEX 35 and PSI 20 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 PSI 20 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 PSI 20 Stock, you can compare the effects of market volatilities on IBEX 35 and PSI 20 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 PSI 20. Check out your portfolio center. Please also check ongoing floating volatility patterns of IBEX 35 and PSI 20.

Diversification Opportunities for IBEX 35 and PSI 20

-0.02

Correlation Coefficient

IBEX 35  PSI 20

Good diversification

The 3 months correlation between IBEX and PSI is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding IBEX 35 Index and PSI 20 Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSI 20 Stock 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 PSI 20. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSI 20 Stock has no effect on the direction of IBEX 35 i.e., IBEX 35 and PSI 20 go up and down completely randomly.

Pair Corralation between IBEX 35 and PSI 20

Assuming the 90 days trading horizon IBEX 35 Index is expected to under-perform the PSI 20. But the index apears to be less risky and, when comparing its historical volatility, IBEX 35 Index is 1.11 times less risky than PSI 20. The index trades about -0.08 of its potential returns per unit of risk. The PSI 20 Stock is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  643,864  in PSI 20 Stock on August 30, 2024 and sell it today you would lose (2,063) from holding PSI 20 Stock or give up 0.32% of portfolio value over 90 days.

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

IBEX 35 Index  vs.  PSI 20 Stock

Pair Trading with IBEX 35 and PSI 20

The main advantage of trading using opposite IBEX 35 and PSI 20 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IBEX 35 position performs unexpectedly, PSI 20 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 PSI 20 will offset losses from the drop in PSI 20's long position.

The idea behind IBEX 35 Index and PSI 20 Stock 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.