Can any of the company-specific risk be diversified away by investing in both IDX 30 and Telkom Indonesia 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 IDX 30 and Telkom Indonesia into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between IDX 30 Jakarta and Telkom Indonesia Tbk, you can compare the effects of market volatilities on IDX 30 and Telkom Indonesia 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 IDX 30 with a short position of Telkom Indonesia. Check out your portfolio center. Please also check ongoing floating volatility patterns of IDX 30 and Telkom Indonesia.
Diversification Opportunities for IDX 30 and Telkom Indonesia
The 3 months correlation between IDX and Telkom is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding IDX 30 Jakarta and Telkom Indonesia Tbk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telkom Indonesia Tbk and IDX 30 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 IDX 30 Jakarta are associated (or correlated) with Telkom Indonesia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telkom Indonesia Tbk has no effect on the direction of IDX 30 i.e., IDX 30 and Telkom Indonesia go up and down completely randomly.
Pair Corralation between IDX 30 and Telkom Indonesia
Assuming the 90 days trading horizon IDX 30 Jakarta is expected to under-perform the Telkom Indonesia. But the index apears to be less risky and, when comparing its historical volatility, IDX 30 Jakarta is 1.49 times less risky than Telkom Indonesia. The index trades about -0.15 of its potential returns per unit of risk. The Telkom Indonesia Tbk is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 287,437 in Telkom Indonesia Tbk on March 6, 2024 and sell it today you would earn a total of 14,563 from holding Telkom Indonesia Tbk or generate 5.07% return on investment over 90 days.