Correlation Between OMX Stockholm and China Securities

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

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

Diversification Opportunities for OMX Stockholm and China Securities

-0.41

Correlation Coefficient

OMX Stockholm  China Securities

Very good diversification

The 3 months correlation between OMX and China is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid 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 OMX Stockholm 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 Stockholm Mid 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 OMX Stockholm i.e., OMX Stockholm and China Securities go up and down completely randomly.

Pair Corralation between OMX Stockholm and China Securities

Assuming the 90 days trading horizon OMX Stockholm Mid is expected to under-perform the China Securities. But the index apears to be less risky and, when comparing its historical volatility, OMX Stockholm Mid is 1.98 times less risky than China Securities. The index trades about -0.02 of its potential returns per unit of risk. The China Securities 800 is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  386,430  in China Securities 800 on September 1, 2024 and sell it today you would earn a total of  37,106  from holding China Securities 800 or generate 9.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	94.62%
Values	Daily Returns

OMX Stockholm Mid  vs.  China Securities 800

Pair Trading with OMX Stockholm and China Securities

The main advantage of trading using opposite OMX Stockholm and China Securities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if OMX Stockholm 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 OMX Stockholm Mid 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.

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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.