Correlation Between PSI 20 and CROBEX

Can any of the company-specific risk be diversified away by investing in both PSI 20 and CROBEX 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 PSI 20 and CROBEX into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between PSI 20 Stock and CROBEX, you can compare the effects of market volatilities on PSI 20 and CROBEX 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 PSI 20 with a short position of CROBEX. Check out your portfolio center. Please also check ongoing floating volatility patterns of PSI 20 and CROBEX.

Diversification Opportunities for PSI 20 and CROBEX

0.14

Correlation Coefficient

PSI 20  CROBEX

Average diversification

The 3 months correlation between PSI and CROBEX is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding PSI 20 Stock and CROBEX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CROBEX and PSI 20 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 PSI 20 Stock are associated (or correlated) with CROBEX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CROBEX has no effect on the direction of PSI 20 i.e., PSI 20 and CROBEX go up and down completely randomly.

Pair Corralation between PSI 20 and CROBEX

Assuming the 90 days trading horizon PSI 20 Stock is expected to generate 2.95 times more return on investment than CROBEX. However, PSI 20 is 2.95 times more volatile than CROBEX. It trades about 0.23 of its potential returns per unit of risk. CROBEX is currently generating about -0.1 per unit of risk. If you would invest  630,721  in PSI 20 Stock on January 30, 2024 and sell it today you would earn a total of  30,530  from holding PSI 20 Stock or generate 4.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.0%
Values	Daily Returns

PSI 20 Stock  vs.  CROBEX

Pair Trading with PSI 20 and CROBEX

The main advantage of trading using opposite PSI 20 and CROBEX positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PSI 20 position performs unexpectedly, CROBEX 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 CROBEX will offset losses from the drop in CROBEX's long position.

The idea behind PSI 20 Stock and CROBEX 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.