Correlation Between IDX 30 and Sumi Indo

Can any of the company-specific risk be diversified away by investing in both IDX 30 and Sumi Indo 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 IDX 30 and Sumi Indo into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between IDX 30 Jakarta and Sumi Indo Kabel, you can compare the effects of market volatilities on IDX 30 and Sumi Indo 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 IDX 30 with a short position of Sumi Indo. Check out your portfolio center. Please also check ongoing floating volatility patterns of IDX 30 and Sumi Indo.

Diversification Opportunities for IDX 30 and Sumi Indo

0.46

Correlation Coefficient

IDX 30  Sumi Indo

Very weak diversification

The 3 months correlation between IDX and Sumi is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding IDX 30 Jakarta and Sumi Indo Kabel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumi Indo Kabel and IDX 30 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 IDX 30 Jakarta are associated (or correlated) with Sumi Indo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumi Indo Kabel has no effect on the direction of IDX 30 i.e., IDX 30 and Sumi Indo go up and down completely randomly.

Pair Corralation between IDX 30 and Sumi Indo

Assuming the 90 days trading horizon IDX 30 Jakarta is expected to generate 0.77 times more return on investment than Sumi Indo. However, IDX 30 Jakarta is 1.31 times less risky than Sumi Indo. It trades about -0.08 of its potential returns per unit of risk. Sumi Indo Kabel is currently generating about -0.13 per unit of risk. If you would invest  47,825  in IDX 30 Jakarta on September 5, 2024 and sell it today you would lose (2,623) from holding IDX 30 Jakarta or give up 5.48% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

IDX 30 Jakarta  vs.  Sumi Indo Kabel

Pair Trading with IDX 30 and Sumi Indo

The main advantage of trading using opposite IDX 30 and Sumi Indo positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IDX 30 position performs unexpectedly, Sumi Indo 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 Sumi Indo will offset losses from the drop in Sumi Indo's long position.

The idea behind IDX 30 Jakarta and Sumi Indo Kabel 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.