Correlation Between PSI 20 and BEL Small

Can any of the company-specific risk be diversified away by investing in both PSI 20 and BEL Small 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 PSI 20 and BEL Small into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between PSI 20 Stock and BEL Small, you can compare the effects of market volatilities on PSI 20 and BEL Small 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 PSI 20 with a short position of BEL Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of PSI 20 and BEL Small.

Diversification Opportunities for PSI 20 and BEL Small

0.84

Correlation Coefficient

PSI 20  BEL Small

Very poor diversification

The 3 months correlation between PSI and BEL is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding PSI 20 Stock and BEL Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BEL Small and PSI 20 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 PSI 20 Stock are associated (or correlated) with BEL Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BEL Small has no effect on the direction of PSI 20 i.e., PSI 20 and BEL Small go up and down completely randomly.

Pair Corralation between PSI 20 and BEL Small

Assuming the 90 days trading horizon PSI 20 Stock is expected to generate 1.61 times more return on investment than BEL Small. However, PSI 20 is 1.61 times more volatile than BEL Small. It trades about -0.15 of its potential returns per unit of risk. BEL Small is currently generating about -0.42 per unit of risk. If you would invest  679,287  in PSI 20 Stock on August 30, 2024 and sell it today you would lose (37,486) from holding PSI 20 Stock or give up 5.52% of portfolio value over 90 days.

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

PSI 20 Stock  vs.  BEL Small

Pair Trading with PSI 20 and BEL Small

The main advantage of trading using opposite PSI 20 and BEL Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PSI 20 position performs unexpectedly, BEL Small 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 BEL Small will offset losses from the drop in BEL Small's long position.

The idea behind PSI 20 Stock and BEL Small 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.