Correlation Between IBEX 35 and Tier1 Technology

Can any of the company-specific risk be diversified away by investing in both IBEX 35 and Tier1 Technology 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 IBEX 35 and Tier1 Technology into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between IBEX 35 Index and Tier1 Technology SA, you can compare the effects of market volatilities on IBEX 35 and Tier1 Technology 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 IBEX 35 with a short position of Tier1 Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of IBEX 35 and Tier1 Technology.

Diversification Opportunities for IBEX 35 and Tier1 Technology

0.74

Correlation Coefficient

IBEX 35  Tier1 Technology

Poor diversification

The 3 months correlation between IBEX and Tier1 is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding IBEX 35 Index and Tier1 Technology SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tier1 Technology and IBEX 35 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 IBEX 35 Index are associated (or correlated) with Tier1 Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tier1 Technology has no effect on the direction of IBEX 35 i.e., IBEX 35 and Tier1 Technology go up and down completely randomly.

Pair Corralation between IBEX 35 and Tier1 Technology

Assuming the 90 days trading horizon IBEX 35 is expected to generate 110.99 times less return on investment than Tier1 Technology. But when comparing it to its historical volatility, IBEX 35 Index is 3.09 times less risky than Tier1 Technology. It trades about 0.01 of its potential returns per unit of risk. Tier1 Technology SA is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  250.00  in Tier1 Technology SA on February 7, 2024 and sell it today you would earn a total of  44.00  from holding Tier1 Technology SA or generate 17.6% return on investment over 90 days.

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

IBEX 35 Index  vs.  Tier1 Technology SA

Pair Trading with IBEX 35 and Tier1 Technology

The main advantage of trading using opposite IBEX 35 and Tier1 Technology positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IBEX 35 position performs unexpectedly, Tier1 Technology 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 Tier1 Technology will offset losses from the drop in Tier1 Technology's long position.

The idea behind IBEX 35 Index and Tier1 Technology SA 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.