Correlation Between OMX Stockholm and Momentum Group

Can any of the company-specific risk be diversified away by investing in both OMX Stockholm and Momentum Group 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 Momentum Group 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 Momentum Group AB, you can compare the effects of market volatilities on OMX Stockholm and Momentum Group 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 Momentum Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of OMX Stockholm and Momentum Group.

Diversification Opportunities for OMX Stockholm and Momentum Group

0.32

Correlation Coefficient

OMX Stockholm  Momentum Group

Weak diversification

The 3 months correlation between OMX and Momentum is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid and Momentum Group AB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Momentum Group AB 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 Momentum Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Momentum Group AB has no effect on the direction of OMX Stockholm i.e., OMX Stockholm and Momentum Group go up and down completely randomly.

Pair Corralation between OMX Stockholm and Momentum Group

Assuming the 90 days trading horizon OMX Stockholm Mid is expected to under-perform the Momentum Group. But the index apears to be less risky and, when comparing its historical volatility, OMX Stockholm Mid is 3.2 times less risky than Momentum Group. The index trades about -0.03 of its potential returns per unit of risk. The Momentum Group AB is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  16,780  in Momentum Group AB on September 3, 2024 and sell it today you would earn a total of  780.00  from holding Momentum Group AB or generate 4.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

OMX Stockholm Mid  vs.  Momentum Group AB

Pair Trading with OMX Stockholm and Momentum Group

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

The idea behind OMX Stockholm Mid and Momentum Group AB 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.