Correlation Between EGX 33 and China Securities

Can any of the company-specific risk be diversified away by investing in both EGX 33 and China Securities 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 EGX 33 and China Securities into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between EGX 33 Shariah and China Securities 800, you can compare the effects of market volatilities on EGX 33 and China Securities 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 EGX 33 with a short position of China Securities. Check out your portfolio center. Please also check ongoing floating volatility patterns of EGX 33 and China Securities.

Diversification Opportunities for EGX 33 and China Securities

0.82

Correlation Coefficient

EGX 33  China Securities

Very poor diversification

The 3 months correlation between EGX and China is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding EGX 33 Shariah and China Securities 800 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Securities 800 and EGX 33 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 EGX 33 Shariah are associated (or correlated) with China Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Securities 800 has no effect on the direction of EGX 33 i.e., EGX 33 and China Securities go up and down completely randomly.

Pair Corralation between EGX 33 and China Securities

Assuming the 90 days trading horizon EGX 33 Shariah is expected to generate 0.61 times more return on investment than China Securities. However, EGX 33 Shariah is 1.64 times less risky than China Securities. It trades about -0.01 of its potential returns per unit of risk. China Securities 800 is currently generating about -0.01 per unit of risk. If you would invest  312,692  in EGX 33 Shariah on August 30, 2024 and sell it today you would lose (2,474) from holding EGX 33 Shariah or give up 0.79% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	89.74%
Values	Daily Returns

EGX 33 Shariah  vs.  China Securities 800

Pair Trading with EGX 33 and China Securities

The main advantage of trading using opposite EGX 33 and China Securities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if EGX 33 position performs unexpectedly, China Securities 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 China Securities will offset losses from the drop in China Securities' long position.

The idea behind EGX 33 Shariah and China Securities 800 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.

Check out your portfolio center.

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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.