Correlation Between DAX Index and BNP Paribas

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

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

Diversification Opportunities for DAX Index and BNP Paribas

-0.33

Correlation Coefficient

DAX Index  BNP Paribas

Very good diversification

The 3 months correlation between DAX and BNP is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and BNP Paribas SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BNP Paribas SA and DAX Index 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 DAX Index are associated (or correlated) with BNP Paribas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BNP Paribas SA has no effect on the direction of DAX Index i.e., DAX Index and BNP Paribas go up and down completely randomly.

Pair Corralation between DAX Index and BNP Paribas

Assuming the 90 days trading horizon DAX Index is expected to generate 0.55 times more return on investment than BNP Paribas. However, DAX Index is 1.82 times less risky than BNP Paribas. It trades about 0.21 of its potential returns per unit of risk. BNP Paribas SA is currently generating about 0.04 per unit of risk. If you would invest  1,932,259  in DAX Index on September 23, 2024 and sell it today you would earn a total of  56,216  from holding DAX Index or generate 2.91% return on investment over 90 days.

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

DAX Index  vs.  BNP Paribas SA

Pair Trading with DAX Index and BNP Paribas

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

The idea behind DAX Index and BNP Paribas 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.