Correlation Between Dow and BASF SE
Can any of the company-specific risk be diversified away by investing in both Dow and BASF SE 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 Dow and BASF SE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dow Inc and BASF SE, you can compare the effects of market volatilities on Dow and BASF SE 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 Dow with a short position of BASF SE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow and BASF SE.
Diversification Opportunities for Dow and BASF SE
Very poor diversification
The 3 months correlation between Dow and BASF is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and BASF SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BASF SE and Dow 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 Dow Inc are associated (or correlated) with BASF SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BASF SE has no effect on the direction of Dow i.e., Dow and BASF SE go up and down completely randomly.
Pair Corralation between Dow and BASF SE
Assuming the 90 days horizon Dow Inc is expected to under-perform the BASF SE. But the stock apears to be less risky and, when comparing its historical volatility, Dow Inc is 1.06 times less risky than BASF SE. The stock trades about -0.19 of its potential returns per unit of risk. The BASF SE is currently generating about -0.16 of returns per unit of risk over similar time horizon. If you would invest 4,604 in BASF SE on August 25, 2024 and sell it today you would lose (346.00) from holding BASF SE or give up 7.52% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Inc vs. BASF SE
Performance |
| Timeline |
| Dow Inc |
| BASF SE |
Dow and BASF SE Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Dow and BASF SE
The main advantage of trading using opposite Dow and BASF SE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow position performs unexpectedly, BASF SE 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 BASF SE will offset losses from the drop in BASF SE's long position.The idea behind Dow Inc and BASF SE 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.| BASF SE vs. North American Construction | BASF SE vs. WIMFARM SA EO | BASF SE vs. TITAN MACHINERY | BASF SE vs. Ming Le Sports |
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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.
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