Correlation Between BEL Small and IBEX 35

Can any of the company-specific risk be diversified away by investing in both BEL Small and IBEX 35 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 BEL Small and IBEX 35 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BEL Small and IBEX 35 Index, you can compare the effects of market volatilities on BEL Small and IBEX 35 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 BEL Small with a short position of IBEX 35. Check out your portfolio center. Please also check ongoing floating volatility patterns of BEL Small and IBEX 35.

Diversification Opportunities for BEL Small and IBEX 35

0.45

Correlation Coefficient

BEL Small  IBEX 35

Very weak diversification

The 3 months correlation between BEL and IBEX is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding BEL Small and IBEX 35 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IBEX 35 Index and BEL Small 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 BEL Small are associated (or correlated) with IBEX 35. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IBEX 35 Index has no effect on the direction of BEL Small i.e., BEL Small and IBEX 35 go up and down completely randomly.

Pair Corralation between BEL Small and IBEX 35

Assuming the 90 days trading horizon BEL Small is expected to under-perform the IBEX 35. But the index apears to be less risky and, when comparing its historical volatility, BEL Small is 1.23 times less risky than IBEX 35. The index trades about -0.09 of its potential returns per unit of risk. The IBEX 35 Index is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,097,560  in IBEX 35 Index on February 1, 2024 and sell it today you would lose (12,120) from holding IBEX 35 Index or give up 1.1% of portfolio value over 90 days.

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

BEL Small  vs.  IBEX 35 Index

Pair Trading with BEL Small and IBEX 35

The main advantage of trading using opposite BEL Small and IBEX 35 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BEL Small position performs unexpectedly, IBEX 35 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 IBEX 35 will offset losses from the drop in IBEX 35's long position.

The idea behind BEL Small and IBEX 35 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.