Correlation Between CME and ASX
Can any of the company-specific risk be diversified away by investing in both CME and ASX 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 CME and ASX into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CME Group and ASX Limited, you can compare the effects of market volatilities on CME and ASX 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 CME with a short position of ASX. Check out your portfolio center. Please also check ongoing floating volatility patterns of CME and ASX.
Diversification Opportunities for CME and ASX
Poor diversification
The 3 months correlation between CME and ASX is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding CME Group and ASX Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ASX Limited and CME 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 CME Group are associated (or correlated) with ASX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ASX Limited has no effect on the direction of CME i.e., CME and ASX go up and down completely randomly.
Pair Corralation between CME and ASX
Assuming the 90 days trading horizon CME Group is expected to generate 0.74 times more return on investment than ASX. However, CME Group is 1.35 times less risky than ASX. It trades about 0.28 of its potential returns per unit of risk. ASX Limited is currently generating about 0.05 per unit of risk. If you would invest 20,949 in CME Group on September 12, 2024 and sell it today you would earn a total of 1,516 from holding CME Group or generate 7.24% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
CME Group vs. ASX Limited
Performance |
| Timeline |
| CME Group |
| ASX Limited |
CME and ASX Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with CME and ASX
The main advantage of trading using opposite CME and ASX positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CME position performs unexpectedly, ASX 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 ASX will offset losses from the drop in ASX's long position.The idea behind CME Group and ASX Limited 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.| ASX vs. Iridium Communications | ASX vs. Singapore Telecommunications Limited | ASX vs. Entravision Communications | ASX vs. Charter Communications |
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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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