Correlation Between BIST Electricity and Budapest

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

By analyzing existing cross correlation between BIST Electricity and Budapest SE, you can compare the effects of market volatilities on BIST Electricity and Budapest 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 BIST Electricity with a short position of Budapest. Check out your portfolio center. Please also check ongoing floating volatility patterns of BIST Electricity and Budapest.

Diversification Opportunities for BIST Electricity and Budapest

-0.37

Correlation Coefficient

BIST Electricity  Budapest

Very good diversification

The 3 months correlation between BIST and Budapest is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding BIST Electricity and Budapest SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Budapest SE and BIST Electricity 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 BIST Electricity are associated (or correlated) with Budapest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Budapest SE has no effect on the direction of BIST Electricity i.e., BIST Electricity and Budapest go up and down completely randomly.

Pair Corralation between BIST Electricity and Budapest

Assuming the 90 days trading horizon BIST Electricity is expected to under-perform the Budapest. In addition to that, BIST Electricity is 1.37 times more volatile than Budapest SE. It trades about -0.02 of its total potential returns per unit of risk. Budapest SE is currently generating about 0.18 per unit of volatility. If you would invest  7,903,400  in Budapest SE on November 27, 2024 and sell it today you would earn a total of  722,872  from holding Budapest SE or generate 9.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	93.65%
Values	Daily Returns

BIST Electricity  vs.  Budapest SE

Pair Trading with BIST Electricity and Budapest

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

The idea behind BIST Electricity and Budapest SE 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.