Correlation Between OMX Copenhagen and Budapest

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

By analyzing existing cross correlation between OMX Copenhagen All and Budapest SE, you can compare the effects of market volatilities on OMX Copenhagen and Budapest 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 OMX Copenhagen with a short position of Budapest. Check out your portfolio center. Please also check ongoing floating volatility patterns of OMX Copenhagen and Budapest.

Diversification Opportunities for OMX Copenhagen and Budapest

-0.8

Correlation Coefficient

OMX Copenhagen  Budapest

Pay attention - limited upside

The 3 months correlation between OMX and Budapest is -0.8. Overlapping area represents the amount of risk that can be diversified away by holding OMX Copenhagen All and Budapest SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Budapest SE and OMX Copenhagen 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 OMX Copenhagen All are associated (or correlated) with Budapest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Budapest SE has no effect on the direction of OMX Copenhagen i.e., OMX Copenhagen and Budapest go up and down completely randomly.

Pair Corralation between OMX Copenhagen and Budapest

Assuming the 90 days trading horizon OMX Copenhagen All is expected to under-perform the Budapest. In addition to that, OMX Copenhagen is 1.56 times more volatile than Budapest SE. It trades about -0.09 of its total potential returns per unit of risk. Budapest SE is currently generating about 0.34 per unit of volatility. If you would invest  7,422,568  in Budapest SE on August 30, 2024 and sell it today you would earn a total of  480,832  from holding Budapest SE or generate 6.48% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

OMX Copenhagen All  vs.  Budapest SE

Pair Trading with OMX Copenhagen and Budapest

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

The idea behind OMX Copenhagen All and Budapest SE 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.

Check out your portfolio center.

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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.