# Correlation Between DOW and Abcam Plc

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

## Diversification Opportunities for DOW and Abcam Plc

 0.89 Correlation Coefficient

### Very poor diversification

The 3 months correlation between DOW and Abcam is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Abcam Plc ADR in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Abcam Plc ADR 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 are associated (or correlated) with Abcam Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Abcam Plc ADR has no effect on the direction of DOW i.e., DOW and Abcam Plc go up and down completely randomly.

## Pair Corralation between DOW and Abcam Plc

Given the investment horizon of 90 days DOW is expected to generate 0.47 times more return on investment than Abcam Plc. However, DOW is 2.11 times less risky than Abcam Plc. It trades about -0.12 of its potential returns per unit of risk. Abcam Plc ADR is currently generating about -0.22 per unit of risk. If you would invest  3,448,076  in DOW on February 15, 2022 and sell it today you would lose (225,734)  from holding DOW or give up 6.55% of portfolio value over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Strong Accuracy 100.0% Values Daily Returns

## DOW  vs.  Abcam Plc ADR

 Performance (%)
 Timeline

## DOW and Abcam Plc Volatility Contrast

 Predicted Return Density
 Returns

## DOW

### Pair trading matchups for DOW

 Salesforce vs. DOW Edison International vs. DOW Alphabet vs. DOW Retail Bull vs. DOW Real Estate vs. DOW On Semiconductor vs. DOW Microsoft Corp vs. DOW Caterpillar vs. DOW Dupont Denemours vs. DOW Global Ship vs. DOW Pfizer 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 DOW and Abcam Plc

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

## DOW

### Pair trading matchups for DOW

 Microsoft Corp vs. DOW Ford vs. DOW Global Ship vs. DOW Alphabet vs. DOW Citigroup vs. DOW Pfizer vs. DOW Retail Bull vs. DOW Caterpillar vs. DOW Constellation Energy vs. DOW Edison International vs. DOW Dupont Denemours vs. DOW Occidental Petroleum 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.
The idea behind DOW and Abcam Plc ADR 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.