Correlation Between AMS Small and Budapest

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

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

Diversification Opportunities for AMS Small and Budapest

0.4

Correlation Coefficient

AMS Small  Budapest

Very weak diversification

The 3 months correlation between AMS and Budapest is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding AMS Small Cap and Budapest SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Budapest SE and AMS Small 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 AMS Small Cap are associated (or correlated) with Budapest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Budapest SE has no effect on the direction of AMS Small i.e., AMS Small and Budapest go up and down completely randomly.

Pair Corralation between AMS Small and Budapest

Assuming the 90 days trading horizon AMS Small Cap is expected to under-perform the Budapest. But the index apears to be less risky and, when comparing its historical volatility, AMS Small Cap is 1.11 times less risky than Budapest. The index trades about -0.08 of its potential returns per unit of risk. The Budapest SE is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  6,581,124  in Budapest SE on January 30, 2024 and sell it today you would earn a total of  122,806  from holding Budapest SE or generate 1.87% return on investment over 90 days.

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

AMS Small Cap  vs.  Budapest SE

Pair Trading with AMS Small and Budapest

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

The idea behind AMS Small Cap and Budapest SE 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.