Correlation Between Vanguard FTSE and CDAX Index

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

By analyzing existing cross correlation between Vanguard FTSE All World and CDAX Index, you can compare the effects of market volatilities on Vanguard FTSE and CDAX Index 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 Vanguard FTSE with a short position of CDAX Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard FTSE and CDAX Index.

Diversification Opportunities for Vanguard FTSE and CDAX Index

0.63

Correlation Coefficient

Vanguard FTSE  CDAX Index

Poor diversification

The 3 months correlation between Vanguard and CDAX is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard FTSE All World and CDAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CDAX Index and Vanguard FTSE 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 Vanguard FTSE All World are associated (or correlated) with CDAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CDAX Index has no effect on the direction of Vanguard FTSE i.e., Vanguard FTSE and CDAX Index go up and down completely randomly.

Pair Corralation between Vanguard FTSE and CDAX Index

Assuming the 90 days trading horizon Vanguard FTSE is expected to generate 5.21 times less return on investment than CDAX Index. But when comparing it to its historical volatility, Vanguard FTSE All World is 1.46 times less risky than CDAX Index. It trades about 0.05 of its potential returns per unit of risk. CDAX Index is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  166,709  in CDAX Index on September 29, 2024 and sell it today you would earn a total of  3,625  from holding CDAX Index or generate 2.17% return on investment over 90 days.

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

Vanguard FTSE All World  vs.  CDAX Index

Pair Trading with Vanguard FTSE and CDAX Index

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

The idea behind Vanguard FTSE All World and CDAX Index 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.