Correlation Between Cboe UK and ISEQ 20

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

By analyzing existing cross correlation between Cboe UK Consumer and ISEQ 20 Price, you can compare the effects of market volatilities on Cboe UK and ISEQ 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 Cboe UK with a short position of ISEQ 20. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cboe UK and ISEQ 20.

Diversification Opportunities for Cboe UK and ISEQ 20

-0.29

Correlation Coefficient

Cboe UK  ISEQ 20

Very good diversification

The 3 months correlation between Cboe and ISEQ is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Cboe UK Consumer and ISEQ 20 Price in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ISEQ 20 Price and Cboe UK 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 Cboe UK Consumer are associated (or correlated) with ISEQ 20. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ISEQ 20 Price has no effect on the direction of Cboe UK i.e., Cboe UK and ISEQ 20 go up and down completely randomly.

Pair Corralation between Cboe UK and ISEQ 20

Assuming the 90 days trading horizon Cboe UK is expected to generate 1.28 times less return on investment than ISEQ 20. But when comparing it to its historical volatility, Cboe UK Consumer is 1.04 times less risky than ISEQ 20. It trades about 0.05 of its potential returns per unit of risk. ISEQ 20 Price is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  119,694  in ISEQ 20 Price on February 1, 2024 and sell it today you would earn a total of  45,627  from holding ISEQ 20 Price or generate 38.12% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Cboe UK Consumer  vs.  ISEQ 20 Price

Pair Trading with Cboe UK and ISEQ 20

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

The idea behind Cboe UK Consumer and ISEQ 20 Price 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.

Check out your portfolio center.

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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.