Correlation Between OMX Stockholm and Leading Edge

Can any of the company-specific risk be diversified away by investing in both OMX Stockholm and Leading Edge 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 Leading Edge 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 Leading Edge Materials, you can compare the effects of market volatilities on OMX Stockholm and Leading Edge 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 Leading Edge. Check out your portfolio center. Please also check ongoing floating volatility patterns of OMX Stockholm and Leading Edge.

Diversification Opportunities for OMX Stockholm and Leading Edge

0.38

Correlation Coefficient

OMX Stockholm  Leading Edge

Weak diversification

The 3 months correlation between OMX and Leading is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding OMX Stockholm Mid and Leading Edge Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Leading Edge Materials 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 Leading Edge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Leading Edge Materials has no effect on the direction of OMX Stockholm i.e., OMX Stockholm and Leading Edge go up and down completely randomly.

Pair Corralation between OMX Stockholm and Leading Edge

Assuming the 90 days trading horizon OMX Stockholm Mid is expected to under-perform the Leading Edge. But the index apears to be less risky and, when comparing its historical volatility, OMX Stockholm Mid is 4.44 times less risky than Leading Edge. The index trades about -0.03 of its potential returns per unit of risk. The Leading Edge Materials is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  79.00  in Leading Edge Materials on September 14, 2024 and sell it today you would lose (2.00) from holding Leading Edge Materials or give up 2.53% of portfolio value over 90 days.

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

OMX Stockholm Mid  vs.  Leading Edge Materials

Pair Trading with OMX Stockholm and Leading Edge

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

The idea behind OMX Stockholm Mid and Leading Edge Materials 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.