Correlation Between DOW and Orsted ADR

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

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

Diversification Opportunities for DOW and Orsted ADR

0.73
  Correlation Coefficient
DOW
Orsted ADR

Poor diversification

The 3 months correlation between DOW and Orsted is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Orsted ADR in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Orsted 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 Orsted ADR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Orsted ADR has no effect on the direction of DOW i.e., DOW and Orsted ADR go up and down completely randomly.
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Pair Corralation between DOW and Orsted ADR

Given the investment horizon of 90 days DOW is expected to generate 0.53 times more return on investment than Orsted ADR. However, DOW is 1.89 times less risky than Orsted ADR. It trades about 0.1 of its potential returns per unit of risk. Orsted ADR is currently generating about 0.04 per unit of risk. If you would invest  2,255,217  in DOW on July 19, 2021 and sell it today you would earn a total of  1,274,259  from holding DOW or generate 56.5% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy99.75%
ValuesDaily Returns

DOW  vs.  Orsted ADR

 Performance (%) 
      Timeline 

DOW and Orsted ADR Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Facebook vs. DOW
Vmware vs. DOW
GM vs. DOW
Citigroup vs. DOW
Square vs. DOW
Salesforce vs. DOW
High Dividend vs. DOW
Visa vs. DOW
Upstart Holdings vs. DOW
Sentinelone Inc vs. DOW
Walker Dunlop 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 Orsted ADR

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

DOW

Pair trading matchups for DOW

Microsoft Corp vs. DOW
Walker Dunlop vs. DOW
Upstart Holdings vs. DOW
GM vs. DOW
Salesforce vs. DOW
High Dividend vs. DOW
General Mills vs. DOW
Square vs. DOW
Visa vs. DOW
Flowers Foods vs. DOW
Facebook 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 Orsted 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.
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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.

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