Correlation Between BIST Electricity and Federal Mogul

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

By analyzing existing cross correlation between BIST Electricity and Federal Mogul Izmit, you can compare the effects of market volatilities on BIST Electricity and Federal Mogul 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 Federal Mogul. Check out your portfolio center. Please also check ongoing floating volatility patterns of BIST Electricity and Federal Mogul.

Diversification Opportunities for BIST Electricity and Federal Mogul

0.61

Correlation Coefficient

BIST Electricity  Federal Mogul

Poor diversification

The 3 months correlation between BIST and Federal is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding BIST Electricity and Federal Mogul Izmit in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Mogul Izmit 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 Federal Mogul. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Mogul Izmit has no effect on the direction of BIST Electricity i.e., BIST Electricity and Federal Mogul go up and down completely randomly.

Pair Corralation between BIST Electricity and Federal Mogul

Assuming the 90 days trading horizon BIST Electricity is expected to under-perform the Federal Mogul. But the index apears to be less risky and, when comparing its historical volatility, BIST Electricity is 1.87 times less risky than Federal Mogul. The index trades about -0.05 of its potential returns per unit of risk. The Federal Mogul Izmit is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  32,575  in Federal Mogul Izmit on September 23, 2024 and sell it today you would lose (75.00) from holding Federal Mogul Izmit or give up 0.23% of portfolio value over 90 days.

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

BIST Electricity  vs.  Federal Mogul Izmit

Pair Trading with BIST Electricity and Federal Mogul

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

The idea behind BIST Electricity and Federal Mogul Izmit 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.