Correlation Between Tel Aviv and Israel Discount

Can any of the company-specific risk be diversified away by investing in both Tel Aviv and Israel Discount 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 Tel Aviv and Israel Discount into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Tel Aviv 35 and Israel Discount Bank, you can compare the effects of market volatilities on Tel Aviv and Israel Discount 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 Tel Aviv with a short position of Israel Discount. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tel Aviv and Israel Discount.

Diversification Opportunities for Tel Aviv and Israel Discount

0.85

Correlation Coefficient

Tel Aviv  Israel Discount

Very poor diversification

The 3 months correlation between Tel and Israel is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Tel Aviv 35 and Israel Discount Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Israel Discount Bank and Tel Aviv 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 Tel Aviv 35 are associated (or correlated) with Israel Discount. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Israel Discount Bank has no effect on the direction of Tel Aviv i.e., Tel Aviv and Israel Discount go up and down completely randomly.

Pair Corralation between Tel Aviv and Israel Discount

Assuming the 90 days trading horizon Tel Aviv 35 is expected to under-perform the Israel Discount. But the index apears to be less risky and, when comparing its historical volatility, Tel Aviv 35 is 2.12 times less risky than Israel Discount. The index trades about -0.1 of its potential returns per unit of risk. The Israel Discount Bank is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  187,500  in Israel Discount Bank on February 2, 2024 and sell it today you would earn a total of  2,400  from holding Israel Discount Bank or generate 1.28% return on investment over 90 days.

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

Tel Aviv 35  vs.  Israel Discount Bank

Pair Trading with Tel Aviv and Israel Discount

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

The idea behind Tel Aviv 35 and Israel Discount Bank 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.