Correlation Between CME and London Stock

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

By analyzing existing cross correlation between CME Group and London Stock Exchange, you can compare the effects of market volatilities on CME and London Stock 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 London Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of CME and London Stock.

Diversification Opportunities for CME and London Stock

0.75

Correlation Coefficient

CME  London Stock

Poor diversification

The 3 months correlation between CME and London is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding CME Group and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange 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 London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of CME i.e., CME and London Stock go up and down completely randomly.

Pair Corralation between CME and London Stock

Considering the 90-day investment horizon CME Group is expected to generate 0.95 times more return on investment than London Stock. However, CME Group is 1.06 times less risky than London Stock. It trades about 0.17 of its potential returns per unit of risk. London Stock Exchange is currently generating about 0.04 per unit of risk. If you would invest  22,827  in CME Group on September 24, 2024 and sell it today you would earn a total of  974.00  from holding CME Group or generate 4.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

CME Group  vs.  London Stock Exchange

CME Group

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CME Group are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, CME may actually be approaching a critical reversion point that can send shares even higher in January 2025.

London Stock Exchange

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, London Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with CME and London Stock

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

The idea behind CME Group and London Stock Exchange 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.

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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.