Correlation Between DAX Index and Diageo Plc

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Can any of the company-specific risk be diversified away by investing in both DAX Index and Diageo Plc 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 DAX Index and Diageo Plc into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DAX Index and Diageo plc, you can compare the effects of market volatilities on DAX Index and Diageo Plc 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 DAX Index with a short position of Diageo Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of DAX Index and Diageo Plc.

Diversification Opportunities for DAX Index and Diageo Plc

-0.07
  Correlation Coefficient

Good diversification

The 3 months correlation between DAX and Diageo is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Diageo plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diageo plc and DAX Index 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 DAX Index are associated (or correlated) with Diageo Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diageo plc has no effect on the direction of DAX Index i.e., DAX Index and Diageo Plc go up and down completely randomly.
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Pair Corralation between DAX Index and Diageo Plc

Assuming the 90 days trading horizon DAX Index is expected to generate 0.48 times more return on investment than Diageo Plc. However, DAX Index is 2.09 times less risky than Diageo Plc. It trades about 0.1 of its potential returns per unit of risk. Diageo plc is currently generating about -0.03 per unit of risk. If you would invest  1,391,407  in DAX Index on September 12, 2024 and sell it today you would earn a total of  641,509  from holding DAX Index or generate 46.11% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

DAX Index  vs.  Diageo plc

 Performance 
       Timeline  

DAX Index and Diageo Plc Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with DAX Index and Diageo Plc

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

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