Correlation Between IBEX 35 and RTSI Index

Can any of the company-specific risk be diversified away by investing in both IBEX 35 and RTSI 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 IBEX 35 and RTSI Index into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between IBEX 35 Index and RTSI Index, you can compare the effects of market volatilities on IBEX 35 and RTSI 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 IBEX 35 with a short position of RTSI Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of IBEX 35 and RTSI Index.

Diversification Opportunities for IBEX 35 and RTSI Index

0.61

Correlation Coefficient

IBEX 35  RTSI Index

Poor diversification

The 3 months correlation between IBEX and RTSI is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding IBEX 35 Index and RTSI Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RTSI Index and IBEX 35 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 IBEX 35 Index are associated (or correlated) with RTSI Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RTSI Index has no effect on the direction of IBEX 35 i.e., IBEX 35 and RTSI Index go up and down completely randomly.

Pair Corralation between IBEX 35 and RTSI Index

Assuming the 90 days trading horizon IBEX 35 Index is expected to generate 1.34 times more return on investment than RTSI Index. However, IBEX 35 is 1.34 times more volatile than RTSI Index. It trades about 0.19 of its potential returns per unit of risk. RTSI Index is currently generating about 0.11 per unit of risk. If you would invest  1,011,710  in IBEX 35 Index on February 4, 2024 and sell it today you would earn a total of  73,760  from holding IBEX 35 Index or generate 7.29% return on investment over 90 days.

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

IBEX 35 Index  vs.  RTSI Index

Pair Trading with IBEX 35 and RTSI Index

The main advantage of trading using opposite IBEX 35 and RTSI Index positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IBEX 35 position performs unexpectedly, RTSI 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 RTSI Index will offset losses from the drop in RTSI Index's long position.

The idea behind IBEX 35 Index and RTSI 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.