Correlation Between DAX Index and Cheniere Energy

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

By analyzing existing cross correlation between DAX Index and Cheniere Energy, you can compare the effects of market volatilities on DAX Index and Cheniere Energy 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 Cheniere Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of DAX Index and Cheniere Energy.

Diversification Opportunities for DAX Index and Cheniere Energy

0.5

Correlation Coefficient

DAX Index  Cheniere Energy

Very weak diversification

The 3 months correlation between DAX and Cheniere is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Cheniere Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cheniere Energy 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 Cheniere Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cheniere Energy has no effect on the direction of DAX Index i.e., DAX Index and Cheniere Energy go up and down completely randomly.

Pair Corralation between DAX Index and Cheniere Energy

Assuming the 90 days trading horizon DAX Index is expected to generate 4.3 times less return on investment than Cheniere Energy. But when comparing it to its historical volatility, DAX Index is 2.41 times less risky than Cheniere Energy. It trades about 0.09 of its potential returns per unit of risk. Cheniere Energy is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  16,396  in Cheniere Energy on September 24, 2024 and sell it today you would earn a total of  3,294  from holding Cheniere Energy or generate 20.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.48%
Values	Daily Returns

DAX Index  vs.  Cheniere Energy

Pair Trading with DAX Index and Cheniere Energy

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

The idea behind DAX Index and Cheniere Energy 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.

Check out your portfolio center.

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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.