Correlation Between ASX and International Business
Can any of the company-specific risk be diversified away by investing in both ASX and International Business 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 ASX and International Business into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ASX Limited and International Business Machines, you can compare the effects of market volatilities on ASX and International Business 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 ASX with a short position of International Business. Check out your portfolio center. Please also check ongoing floating volatility patterns of ASX and International Business.
Diversification Opportunities for ASX and International Business
0.5 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between ASX and International is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding ASX Limited and International Business Machine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Business and ASX 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 ASX Limited are associated (or correlated) with International Business. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Business has no effect on the direction of ASX i.e., ASX and International Business go up and down completely randomly.
Pair Corralation between ASX and International Business
Assuming the 90 days horizon ASX Limited is expected to under-perform the International Business. In addition to that, ASX is 1.92 times more volatile than International Business Machines. It trades about -0.25 of its total potential returns per unit of risk. International Business Machines is currently generating about -0.12 per unit of volatility. If you would invest 18,879 in International Business Machines on January 25, 2024 and sell it today you would lose (469.00) from holding International Business Machines or give up 2.48% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
ASX Limited vs. International Business Machine
Performance |
| Timeline |
| ASX Limited |
| International Business |
ASX and International Business Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with ASX and International Business
The main advantage of trading using opposite ASX and International Business positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ASX position performs unexpectedly, International Business 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 International Business will offset losses from the drop in International Business' long position.The idea behind ASX Limited and International Business Machines 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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