Correlation Between Budapest and AMS Small

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

By analyzing existing cross correlation between Budapest SE and AMS Small Cap, you can compare the effects of market volatilities on Budapest and AMS Small 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 Budapest with a short position of AMS Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Budapest and AMS Small.

Diversification Opportunities for Budapest and AMS Small

0.39

Correlation Coefficient

Budapest  AMS Small

Weak diversification

The 3 months correlation between Budapest and AMS is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Budapest SE and AMS Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AMS Small Cap and Budapest 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 Budapest SE are associated (or correlated) with AMS Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AMS Small Cap has no effect on the direction of Budapest i.e., Budapest and AMS Small go up and down completely randomly.

Pair Corralation between Budapest and AMS Small

Assuming the 90 days trading horizon Budapest SE is expected to generate 1.11 times more return on investment than AMS Small. However, Budapest is 1.11 times more volatile than AMS Small Cap. It trades about 0.13 of its potential returns per unit of risk. AMS Small Cap is currently generating about -0.17 per unit of risk. If you would invest  6,538,460  in Budapest SE on January 28, 2024 and sell it today you would earn a total of  165,470  from holding Budapest SE or generate 2.53% return on investment over 90 days.

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

Budapest SE  vs.  AMS Small Cap

Pair Trading with Budapest and AMS Small

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

The idea behind Budapest SE and AMS Small Cap 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.