Correlation Between Overlay Shares and Xtrackers

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

By analyzing existing cross correlation between Overlay Shares Core and Xtrackers SP 500, you can compare the effects of market volatilities on Overlay Shares and Xtrackers 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 Overlay Shares with a short position of Xtrackers. Check out your portfolio center. Please also check ongoing floating volatility patterns of Overlay Shares and Xtrackers.

Diversification Opportunities for Overlay Shares and Xtrackers

0.01

Correlation Coefficient

Overlay Shares  Xtrackers

Significant diversification

The 3 months correlation between Overlay and Xtrackers is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Overlay Shares Core and Xtrackers SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xtrackers SP 500 and Overlay Shares 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 Overlay Shares Core are associated (or correlated) with Xtrackers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xtrackers SP 500 has no effect on the direction of Overlay Shares i.e., Overlay Shares and Xtrackers go up and down completely randomly.

Pair Corralation between Overlay Shares and Xtrackers

Considering the 90-day investment horizon Overlay Shares is expected to generate 8.4 times less return on investment than Xtrackers. But when comparing it to its historical volatility, Overlay Shares Core is 1.66 times less risky than Xtrackers. It trades about 0.02 of its potential returns per unit of risk. Xtrackers SP 500 is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,426  in Xtrackers SP 500 on October 10, 2024 and sell it today you would earn a total of  1,922  from holding Xtrackers SP 500 or generate 56.1% return on investment over 90 days.

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

Overlay Shares Core  vs.  Xtrackers SP 500

Overlay Shares Core

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Overlay Shares Core has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Overlay Shares is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Xtrackers SP 500

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Xtrackers SP 500 are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Xtrackers is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Overlay Shares and Xtrackers

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

The idea behind Overlay Shares Core and Xtrackers SP 500 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.