# Correlation Between DOW and Canadian Utilities

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

## Diversification Opportunities for DOW and Canadian Utilities

 0.47 Correlation Coefficient

### Very weak diversification

The 3 months correlation between DOW and Canadian is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Canadian Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Utilities 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 Canadian Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Utilities has no effect on the direction of DOW i.e., DOW and Canadian Utilities go up and down completely randomly.

## Pair Corralation between DOW and Canadian Utilities

Given the investment horizon of 90 days DOW is expected to generate 6.28 times less return on investment than Canadian Utilities. But when comparing it to its historical volatility, DOW is 7.93 times less risky than Canadian Utilities. It trades about 0.04 of its potential returns per unit of risk. Canadian Utilities is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,204  in Canadian Utilities on May 15, 2022 and sell it today you would earn a total of  701.00  from holding Canadian Utilities or generate 31.81% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Weak Accuracy 100.0% Values Daily Returns

 Performance (%)
 Timeline

## DOW and Canadian Utilities Volatility Contrast

 Predicted Return Density
 Returns

## DOW

### Pair trading matchups for DOW

 Essential Properties vs. DOW Universal Health vs. DOW Olema Pharmaceuticals vs. DOW Rolls Royce vs. DOW Prog Hldgs vs. DOW Horizon Therapeutics vs. DOW Ark Innovation vs. DOW Cto Realty vs. DOW Semiconductor Bear 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 main advantage of trading using opposite DOW and Canadian Utilities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, Canadian Utilities 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 Canadian Utilities will offset losses from the drop in Canadian Utilities' long position.

## DOW

### Pair trading matchups for DOW

 Horizon Therapeutics vs. DOW Nike vs. DOW Ark Innovation vs. DOW Olema Pharmaceuticals vs. DOW Rolls Royce vs. DOW Essential Properties vs. DOW Prog Hldgs vs. DOW Universal Health 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 Canadian Utilities 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.