Correlation Between OMX Stockholm and Hufvudstaden

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

By analyzing existing cross correlation between OMX Stockholm Mid and Hufvudstaden AB, you can compare the effects of market volatilities on OMX Stockholm and Hufvudstaden 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 OMX Stockholm with a short position of Hufvudstaden. Check out your portfolio center. Please also check ongoing floating volatility patterns of OMX Stockholm and Hufvudstaden.

Diversification Opportunities for OMX Stockholm and Hufvudstaden

0.7

Correlation Coefficient

OMX Stockholm  Hufvudstaden

Poor diversification

The 3 months correlation between OMX and Hufvudstaden is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid and Hufvudstaden AB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hufvudstaden AB and OMX Stockholm 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 OMX Stockholm Mid are associated (or correlated) with Hufvudstaden. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hufvudstaden AB has no effect on the direction of OMX Stockholm i.e., OMX Stockholm and Hufvudstaden go up and down completely randomly.

Pair Corralation between OMX Stockholm and Hufvudstaden

Assuming the 90 days trading horizon OMX Stockholm Mid is expected to generate 0.62 times more return on investment than Hufvudstaden. However, OMX Stockholm Mid is 1.6 times less risky than Hufvudstaden. It trades about -0.03 of its potential returns per unit of risk. Hufvudstaden AB is currently generating about -0.15 per unit of risk. If you would invest  167,886  in OMX Stockholm Mid on September 13, 2024 and sell it today you would lose (2,149) from holding OMX Stockholm Mid or give up 1.28% of portfolio value over 90 days.

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

OMX Stockholm Mid  vs.  Hufvudstaden AB

Pair Trading with OMX Stockholm and Hufvudstaden

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

The idea behind OMX Stockholm Mid and Hufvudstaden AB 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.