Correlation Between China Communications and CDAX Index

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

By analyzing existing cross correlation between China Communications Services and CDAX Index, you can compare the effects of market volatilities on China Communications and CDAX Index 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 China Communications with a short position of CDAX Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Communications and CDAX Index.

Diversification Opportunities for China Communications and CDAX Index

0.53

Correlation Coefficient

China Communications  CDAX Index

Very weak diversification

The 3 months correlation between China and CDAX is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding China Communications Services and CDAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CDAX Index and China Communications 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 China Communications Services are associated (or correlated) with CDAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CDAX Index has no effect on the direction of China Communications i.e., China Communications and CDAX Index go up and down completely randomly.

Pair Corralation between China Communications and CDAX Index

Assuming the 90 days horizon China Communications Services is expected to generate 2.26 times more return on investment than CDAX Index. However, China Communications is 2.26 times more volatile than CDAX Index. It trades about 0.37 of its potential returns per unit of risk. CDAX Index is currently generating about 0.18 per unit of risk. If you would invest  48.00  in China Communications Services on September 29, 2024 and sell it today you would earn a total of  5.00  from holding China Communications Services or generate 10.42% return on investment over 90 days.

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

China Communications Services  vs.  CDAX Index

Pair Trading with China Communications and CDAX Index

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

The idea behind China Communications Services and CDAX Index 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.