Correlation Between AMS Small and VanEck IBoxx

Can any of the company-specific risk be diversified away by investing in both AMS Small and VanEck IBoxx 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 VanEck IBoxx 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 VanEck iBoxx EUR, you can compare the effects of market volatilities on AMS Small and VanEck IBoxx 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 VanEck IBoxx. Check out your portfolio center. Please also check ongoing floating volatility patterns of AMS Small and VanEck IBoxx.

Diversification Opportunities for AMS Small and VanEck IBoxx

0.26

Correlation Coefficient

AMS Small  VanEck IBoxx

Modest diversification

The 3 months correlation between AMS and VanEck is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding AMS Small Cap and VanEck iBoxx EUR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VanEck iBoxx EUR 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 VanEck IBoxx. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VanEck iBoxx EUR has no effect on the direction of AMS Small i.e., AMS Small and VanEck IBoxx go up and down completely randomly.

Pair Corralation between AMS Small and VanEck IBoxx

Assuming the 90 days trading horizon AMS Small Cap is expected to generate 4.37 times more return on investment than VanEck IBoxx. However, AMS Small is 4.37 times more volatile than VanEck iBoxx EUR. It trades about 0.08 of its potential returns per unit of risk. VanEck iBoxx EUR is currently generating about 0.11 per unit of risk. If you would invest  118,382  in AMS Small Cap on September 14, 2024 and sell it today you would earn a total of  5,651  from holding AMS Small Cap or generate 4.77% return on investment over 90 days.

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

AMS Small Cap  vs.  VanEck iBoxx EUR

Pair Trading with AMS Small and VanEck IBoxx

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

The idea behind AMS Small Cap and VanEck iBoxx EUR 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.