Correlation Between DAX Index and Lowes Companies

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

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

Diversification Opportunities for DAX Index and Lowes Companies

0.83

Correlation Coefficient

DAX Index  Lowes Companies

Very poor diversification

The 3 months correlation between DAX and Lowes is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Lowes Companies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lowes Companies 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 Lowes Companies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lowes Companies has no effect on the direction of DAX Index i.e., DAX Index and Lowes Companies go up and down completely randomly.

Pair Corralation between DAX Index and Lowes Companies

Assuming the 90 days trading horizon DAX Index is expected to generate 3.15 times less return on investment than Lowes Companies. But when comparing it to its historical volatility, DAX Index is 1.89 times less risky than Lowes Companies. It trades about 0.09 of its potential returns per unit of risk. Lowes Companies is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  22,277  in Lowes Companies on September 3, 2024 and sell it today you would earn a total of  3,438  from holding Lowes Companies or generate 15.43% return on investment over 90 days.

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

DAX Index  vs.  Lowes Companies

Pair Trading with DAX Index and Lowes Companies

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

The idea behind DAX Index and Lowes Companies 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..