Correlation Between Kosdaq Composite and Dongbu Steel

Can any of the company-specific risk be diversified away by investing in both Kosdaq Composite and Dongbu Steel 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 Kosdaq Composite and Dongbu Steel into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Kosdaq Composite Index and Dongbu Steel Co, you can compare the effects of market volatilities on Kosdaq Composite and Dongbu Steel 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 Kosdaq Composite with a short position of Dongbu Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Kosdaq Composite and Dongbu Steel.

Diversification Opportunities for Kosdaq Composite and Dongbu Steel

0.26

Correlation Coefficient

Kosdaq Composite  Dongbu Steel

Modest diversification

The 3 months correlation between Kosdaq and Dongbu is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Kosdaq Composite Index and Dongbu Steel Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dongbu Steel and Kosdaq Composite 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 Kosdaq Composite Index are associated (or correlated) with Dongbu Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dongbu Steel has no effect on the direction of Kosdaq Composite i.e., Kosdaq Composite and Dongbu Steel go up and down completely randomly.

Pair Corralation between Kosdaq Composite and Dongbu Steel

Assuming the 90 days trading horizon Kosdaq Composite Index is expected to generate 0.74 times more return on investment than Dongbu Steel. However, Kosdaq Composite Index is 1.36 times less risky than Dongbu Steel. It trades about 0.13 of its potential returns per unit of risk. Dongbu Steel Co is currently generating about -0.01 per unit of risk. If you would invest  68,291  in Kosdaq Composite Index on November 20, 2024 and sell it today you would earn a total of  8,450  from holding Kosdaq Composite Index or generate 12.37% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.28%
Values	Daily Returns

Kosdaq Composite Index  vs.  Dongbu Steel Co

Pair Trading with Kosdaq Composite and Dongbu Steel

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

The idea behind Kosdaq Composite Index and Dongbu Steel Co 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.