Correlation Between OMX Stockholm and Nordea Bank

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

Diversification Opportunities for OMX Stockholm and Nordea Bank

0.75

Correlation Coefficient

OMX Stockholm  Nordea Bank

Poor diversification

The 3 months correlation between OMX and Nordea is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid and Nordea Bank Abp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nordea Bank Abp 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 Nordea Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nordea Bank Abp has no effect on the direction of OMX Stockholm i.e., OMX Stockholm and Nordea Bank go up and down completely randomly.

Pair Corralation between OMX Stockholm and Nordea Bank

Assuming the 90 days trading horizon OMX Stockholm is expected to generate 2.42 times less return on investment than Nordea Bank. But when comparing it to its historical volatility, OMX Stockholm Mid is 1.53 times less risky than Nordea Bank. It trades about 0.14 of its potential returns per unit of risk. Nordea Bank Abp is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  12,335  in Nordea Bank Abp on November 29, 2024 and sell it today you would earn a total of  1,955  from holding Nordea Bank Abp or generate 15.85% return on investment over 90 days.

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

OMX Stockholm Mid  vs.  Nordea Bank Abp

Pair Trading with OMX Stockholm and Nordea Bank

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

The idea behind OMX Stockholm Mid and Nordea Bank Abp 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 Stocks Directory module to find actively traded stocks across global markets.