Correlation Between DOW and GATX Corp

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

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

Diversification Opportunities for DOW and GATX Corp

-0.22
  Correlation Coefficient
DOW
GATX Corp

Very good diversification

The 3 months correlation between DOW and GATX Corp is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding DOW and GATX Corp in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on GATX Corp 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 GATX Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GATX Corp has no effect on the direction of DOW i.e., DOW and GATX Corp go up and down completely randomly.
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Pair Corralation between DOW and GATX Corp

Given the investment horizon of 90 days DOW is expected to generate 1.59 times less return on investment than GATX Corp. But when comparing it to its historical volatility, DOW is 2.08 times less risky than GATX Corp. It trades about 0.11 of its potential returns per unit of risk. GATX Corp is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  6,481  in GATX Corp on May 4, 2021 and sell it today you would earn a total of  2,799  from holding GATX Corp or generate 43.19% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy99.6%
ValuesDaily Returns

DOW  vs.  GATX Corp

 Performance (%) 
      Timeline 

DOW and GATX Corp Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Superior Industries vs. DOW
Goliath Resources vs. DOW
CYBIN INC vs. DOW
Biohaven Pharmaceutical vs. DOW
Microsoft Corp vs. DOW
Ramaco Resources vs. DOW
Ford vs. DOW
Tenneco Automotive vs. DOW
Visa vs. DOW
Aspen Aerogels 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 GATX Corp

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

DOW

Pair trading matchups for DOW

Alphabet vs. DOW
Biohaven Pharmaceutical vs. DOW
Aspen Aerogels vs. DOW
Alpha Metallurgical vs. DOW
Microsoft Corp vs. DOW
CYBIN INC vs. DOW
Tenneco Automotive vs. DOW
Goliath Resources vs. DOW
Visa 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 GATX Corp 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.

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