Correlation Between Dow and Alcoa Corp

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

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

Diversification Opportunities for Dow and Alcoa Corp

0.08

Correlation Coefficient

Dow  Alcoa Corp

Significant diversification

The 3 months correlation between Dow and Alcoa is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp and Dow 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 Dow Inc are associated (or correlated) with Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of Dow i.e., Dow and Alcoa Corp go up and down completely randomly.

Pair Corralation between Dow and Alcoa Corp

Considering the 90-day investment horizon Dow Inc is expected to generate 0.44 times more return on investment than Alcoa Corp. However, Dow Inc is 2.3 times less risky than Alcoa Corp. It trades about 0.03 of its potential returns per unit of risk. Alcoa Corp is currently generating about 0.01 per unit of risk. If you would invest  4,598  in Dow Inc on March 14, 2024 and sell it today you would earn a total of  1,017  from holding Dow Inc or generate 22.12% return on investment over 90 days.

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

Dow Inc  vs.  Alcoa Corp

Dow Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dow Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Dow is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Alcoa Corp

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Alcoa Corp are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Alcoa Corp sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dow and Alcoa Corp

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

The idea behind Dow Inc and Alcoa Corp 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.