Correlation Between OMX Stockholm and RTSI Index

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

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

Diversification Opportunities for OMX Stockholm and RTSI Index

0.65

Correlation Coefficient

OMX Stockholm  RTSI Index

Poor diversification

The 3 months correlation between OMX and RTSI is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid and RTSI Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RTSI Index and OMX Stockholm 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 OMX Stockholm Mid are associated (or correlated) with RTSI Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RTSI Index has no effect on the direction of OMX Stockholm i.e., OMX Stockholm and RTSI Index go up and down completely randomly.

Pair Corralation between OMX Stockholm and RTSI Index

Assuming the 90 days trading horizon OMX Stockholm is expected to generate 13.65 times less return on investment than RTSI Index. In addition to that, OMX Stockholm is 1.43 times more volatile than RTSI Index. It trades about 0.01 of its total potential returns per unit of risk. RTSI Index is currently generating about 0.19 per unit of volatility. If you would invest  114,730  in RTSI Index on February 1, 2024 and sell it today you would earn a total of  2,712  from holding RTSI Index or generate 2.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

OMX Stockholm Mid  vs.  RTSI Index

Pair Trading with OMX Stockholm and RTSI Index

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

The idea behind OMX Stockholm Mid and RTSI 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.