Correlation Between Stock Exchange and DAX Index

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

By analyzing existing cross correlation between Stock Exchange Of and DAX Index, you can compare the effects of market volatilities on Stock Exchange and DAX Index 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 Stock Exchange with a short position of DAX Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stock Exchange and DAX Index.

Diversification Opportunities for Stock Exchange and DAX Index

0.69

Correlation Coefficient

Stock Exchange  DAX Index

Poor diversification

The 3 months correlation between Stock and DAX is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Stock Exchange Of and DAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DAX Index and Stock Exchange 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 Stock Exchange Of are associated (or correlated) with DAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DAX Index has no effect on the direction of Stock Exchange i.e., Stock Exchange and DAX Index go up and down completely randomly.

Pair Corralation between Stock Exchange and DAX Index

Assuming the 90 days trading horizon Stock Exchange Of is expected to under-perform the DAX Index. But the index apears to be less risky and, when comparing its historical volatility, Stock Exchange Of is 1.41 times less risky than DAX Index. The index trades about -0.09 of its potential returns per unit of risk. The DAX Index is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,947,807  in DAX Index on August 30, 2024 and sell it today you would lose (21,632) from holding DAX Index or give up 1.11% of portfolio value over 90 days.

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

Stock Exchange Of  vs.  DAX Index

Pair Trading with Stock Exchange and DAX Index

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

The idea behind Stock Exchange Of and DAX Index 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.