Correlation Between Taiwan Weighted and DAX Index

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

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

Diversification Opportunities for Taiwan Weighted and DAX Index

0.92

Correlation Coefficient

Taiwan Weighted  DAX Index

Almost no diversification

The 3 months correlation between Taiwan and DAX is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Taiwan Weighted and DAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DAX Index and Taiwan Weighted 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 Taiwan Weighted are associated (or correlated) with DAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DAX Index has no effect on the direction of Taiwan Weighted i.e., Taiwan Weighted and DAX Index go up and down completely randomly.

Pair Corralation between Taiwan Weighted and DAX Index

Assuming the 90 days trading horizon Taiwan Weighted is expected to generate 1.95 times more return on investment than DAX Index. However, Taiwan Weighted is 1.95 times more volatile than DAX Index. It trades about -0.01 of its potential returns per unit of risk. DAX Index is currently generating about -0.12 per unit of risk. If you would invest  2,041,770  in Taiwan Weighted on February 4, 2024 and sell it today you would lose (8,738) from holding Taiwan Weighted or give up 0.43% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	86.36%
Values	Daily Returns

Taiwan Weighted  vs.  DAX Index

Pair Trading with Taiwan Weighted and DAX Index

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

The idea behind Taiwan Weighted and DAX 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.