# Correlation Between BSE and DOW

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Can any of the company-specific risk be diversified away by investing in both BSE and DOW 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 BSE and DOW into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BSE and DOW, you can compare the effects of market volatilities on BSE and DOW 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 BSE with a short position of DOW. Check out your portfolio center. Please also check ongoing floating volatility patterns of BSE and DOW.

## Diversification Opportunities for BSE and DOW

 0.76 Correlation Coefficient

### Poor diversification

The 3 months correlation between BSE and DOW is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding BSE and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and BSE 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 BSE are associated (or correlated) with DOW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW has no effect on the direction of BSE i.e., BSE and DOW go up and down completely randomly.

## Pair Corralation between BSE and DOW

Assuming the 90 days trading horizon BSE is expected to generate 0.77 times more return on investment than DOW. However, BSE is 1.29 times less risky than DOW. It trades about 0.63 of its potential returns per unit of risk. DOW is currently generating about 0.38 per unit of risk. If you would invest  5,351,415  in BSE on May 13, 2022 and sell it today you would earn a total of  581,845  from holding BSE or generate 10.87% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Significant Accuracy 95.65% Values Daily Returns

## BSE  vs.  DOW

 Performance (%)
 Timeline

## BSE and DOW Volatility Contrast

 Predicted Return Density
 Returns

## BSE

### Pair trading matchups for BSE

 Boeing vs. BSE Nasdaq vs. BSE Home Bancshares vs. BSE Lpl Financial vs. BSE Erie Indemnity vs. BSE First Citizens vs. BSE
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against BSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. BSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, BSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to BSE.

## DOW

### Pair trading matchups for DOW

 Home Bancshares vs. DOW Erie Indemnity vs. DOW Ezcorp vs. DOW Starbucks Corp vs. DOW First Citizens vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.

## Pair Trading with BSE and DOW

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

## BSE

### Pair trading matchups for BSE

Erie Indemnity vs. BSE
Ezcorp vs. BSE
Boeing vs. BSE
First Citizens vs. BSE
Starbucks Corp vs. BSE
Nasdaq vs. BSE
Home Bancshares vs. BSE
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against BSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. BSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, BSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to BSE.
The idea behind BSE and DOW 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.

## DOW

### Pair trading matchups for DOW

Boeing vs. DOW
Bancfirst Corp vs. DOW
Nasdaq vs. DOW
Starbucks Corp vs. DOW
Ezcorp vs. DOW
Erie Indemnity vs. DOW
Lpl Financial vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.
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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.

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