Correlation Between DOW and Chow Tai

By analyzing existing cross correlation between DOW and Chow Tai Fook, you can compare the effects of market volatilities on DOW and Chow Tai 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 Chow Tai. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and Chow Tai.

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

Diversification Opportunities for DOW and Chow Tai

0.63
  Correlation Coefficient
DOW
Chow Tai Fook

Poor diversification

The 3 months correlation between DOW and CJEWY is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Chow Tai Fook in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Chow Tai Fook 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 Chow Tai. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chow Tai Fook has no effect on the direction of DOW i.e., DOW and Chow Tai go up and down completely randomly.
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Pair Corralation between DOW and Chow Tai

Given the investment horizon of 90 days DOW is expected to generate 2.29 times less return on investment than Chow Tai. But when comparing it to its historical volatility, DOW is 3.42 times less risky than Chow Tai. It trades about 0.1 of its potential returns per unit of risk. Chow Tai Fook is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,232  in Chow Tai Fook on September 8, 2021 and sell it today you would earn a total of  501.00  from holding Chow Tai Fook or generate 40.67% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Chow Tai Fook

 Performance (%) 
      Timeline 

DOW and Chow Tai Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Salesforce vs. DOW
Visa vs. DOW
Alphabet vs. DOW
Adv Micro vs. DOW
Vmware vs. DOW
Sentinelone Inc vs. DOW
Citigroup vs. DOW
Microsoft Corp vs. DOW
Du Pont 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.

Chow Tai Fook

Pair trading matchups for Chow Tai

Pair Trading with DOW and Chow Tai

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

DOW

Pair trading matchups for DOW

Alphabet vs. DOW
Sentinelone Inc vs. DOW
Ford vs. DOW
Adv Micro vs. DOW
Salesforce vs. DOW
Microsoft Corp vs. DOW
Vmware vs. DOW
Citigroup 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 Chow Tai Fook 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.

Chow Tai Fook

Pair trading matchups for Chow Tai

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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.

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