Correlation Between DOW and Std Bk

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

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

Diversification Opportunities for DOW and Std Bk

-0.44
  Correlation Coefficient
DOW
Std Bk Grp

Very good diversification

The 3 months correlation between DOW and SGBLY is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Std Bk Grp in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Std Bk Grp 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 Std Bk. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Std Bk Grp has no effect on the direction of DOW i.e., DOW and Std Bk go up and down completely randomly.
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Pair Corralation between DOW and Std Bk

Given the investment horizon of 90 days DOW is expected to generate 0.3 times more return on investment than Std Bk. However, DOW is 3.29 times less risky than Std Bk. It trades about 0.0 of its potential returns per unit of risk. Std Bk Grp is currently generating about -0.05 per unit of risk. If you would invest  3,475,639  in DOW on September 2, 2021 and sell it today you would lose (16,684)  from holding DOW or give up 0.48% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Std Bk Grp

 Performance (%) 
      Timeline 

DOW and Std Bk Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Meta Platforms vs. DOW
Visa vs. DOW
Ford vs. DOW
Sentinelone Inc vs. DOW
Twitter vs. DOW
Du Pont vs. DOW
Vmware vs. DOW
Alphabet 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 Std Bk

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

DOW

Pair trading matchups for DOW

Sentinelone Inc vs. DOW
Alphabet vs. DOW
Microsoft Corp vs. DOW
Ford vs. DOW
Vmware vs. DOW
Salesforce vs. DOW
Visa 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.
The idea behind DOW and Std Bk Grp 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.

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