Correlation Between Tel Aviv and PSI 20

Can any of the company-specific risk be diversified away by investing in both Tel Aviv and PSI 20 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 Tel Aviv and PSI 20 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Tel Aviv 35 and PSI 20 Stock, you can compare the effects of market volatilities on Tel Aviv and PSI 20 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 Tel Aviv with a short position of PSI 20. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tel Aviv and PSI 20.

Diversification Opportunities for Tel Aviv and PSI 20

-0.85

Correlation Coefficient

Tel Aviv  PSI 20

Pay attention - limited upside

The 3 months correlation between Tel and PSI is -0.85. Overlapping area represents the amount of risk that can be diversified away by holding Tel Aviv 35 and PSI 20 Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSI 20 Stock and Tel Aviv 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 Tel Aviv 35 are associated (or correlated) with PSI 20. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSI 20 Stock has no effect on the direction of Tel Aviv i.e., Tel Aviv and PSI 20 go up and down completely randomly.

Pair Corralation between Tel Aviv and PSI 20

Assuming the 90 days trading horizon Tel Aviv 35 is expected to generate 0.82 times more return on investment than PSI 20. However, Tel Aviv 35 is 1.22 times less risky than PSI 20. It trades about 0.25 of its potential returns per unit of risk. PSI 20 Stock is currently generating about -0.01 per unit of risk. If you would invest  218,986  in Tel Aviv 35 on August 30, 2024 and sell it today you would earn a total of  8,695  from holding Tel Aviv 35 or generate 3.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	81.82%
Values	Daily Returns

Tel Aviv 35  vs.  PSI 20 Stock

Pair Trading with Tel Aviv and PSI 20

The main advantage of trading using opposite Tel Aviv and PSI 20 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tel Aviv position performs unexpectedly, PSI 20 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 PSI 20 will offset losses from the drop in PSI 20's long position.

The idea behind Tel Aviv 35 and PSI 20 Stock 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.