Correlation Between DAX Index and WisdomTree Carbon

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

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

Diversification Opportunities for DAX Index and WisdomTree Carbon

0.2

Correlation Coefficient

DAX Index  WisdomTree Carbon

Modest diversification

The 3 months correlation between DAX and WisdomTree is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and WisdomTree Carbon in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree Carbon 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 WisdomTree Carbon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree Carbon has no effect on the direction of DAX Index i.e., DAX Index and WisdomTree Carbon go up and down completely randomly.

Pair Corralation between DAX Index and WisdomTree Carbon

Assuming the 90 days trading horizon DAX Index is expected to generate 0.31 times more return on investment than WisdomTree Carbon. However, DAX Index is 3.2 times less risky than WisdomTree Carbon. It trades about 0.21 of its potential returns per unit of risk. WisdomTree Carbon is currently generating about -0.03 per unit of risk. If you would invest  1,929,598  in DAX Index on September 27, 2024 and sell it today you would earn a total of  55,279  from holding DAX Index or generate 2.86% return on investment over 90 days.

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

DAX Index  vs.  WisdomTree Carbon

Pair Trading with DAX Index and WisdomTree Carbon

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

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