Correlation Between DAX Index and BEL Small

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

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

Diversification Opportunities for DAX Index and BEL Small

0.44

Correlation Coefficient

DAX Index  BEL Small

Very weak diversification

The 3 months correlation between DAX and BEL is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and BEL Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BEL Small and DAX Index 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 DAX Index are associated (or correlated) with BEL Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BEL Small has no effect on the direction of DAX Index i.e., DAX Index and BEL Small go up and down completely randomly.

Pair Corralation between DAX Index and BEL Small

Assuming the 90 days trading horizon DAX Index is expected to under-perform the BEL Small. But the index apears to be less risky and, when comparing its historical volatility, DAX Index is 1.04 times less risky than BEL Small. The index trades about -0.1 of its potential returns per unit of risk. The BEL Small is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  928,234  in BEL Small on February 2, 2024 and sell it today you would lose (17,070) from holding BEL Small or give up 1.84% of portfolio value over 90 days.

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

DAX Index  vs.  BEL Small

Pair Trading with DAX Index and BEL Small

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

The idea behind DAX Index and BEL Small 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.