# Correlation Between DOW and Twitter

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

## Diversification Opportunities for DOW and Twitter

 0.19 Correlation Coefficient

### Average diversification

The 3 months correlation between DOW and Twitter is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Twitter in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Twitter 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 Twitter. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Twitter has no effect on the direction of DOW i.e., DOW and Twitter go up and down completely randomly.

## Pair Corralation between DOW and Twitter

Given the investment horizon of 90 days DOW is expected to generate 0.44 times more return on investment than Twitter. However, DOW is 2.26 times less risky than Twitter. It trades about -0.05 of its potential returns per unit of risk. Twitter is currently generating about -0.23 per unit of risk. If you would invest  3,330,193  in DOW on February 26, 2022 and sell it today you would lose (66,474)  from holding DOW or give up 2.0% of portfolio value over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Insignificant Accuracy 100.0% Values Daily Returns

 Performance (%)
 Timeline

## DOW and Twitter Volatility Contrast

 Predicted Return Density
 Returns

## DOW

### Pair trading matchups for DOW

 HITHINK ROYALFLUSH vs. DOW Salesforce vs. DOW Microsoft Corp vs. DOW Meta Platforms vs. DOW Vmware vs. DOW Atlassian Cls vs. DOW FUJIAN AONONG vs. DOW BANK OF NINGBO vs. DOW Ford vs. DOW Visa vs. DOW Otp Bank vs. DOW LINGYI ITECH 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 Twitter positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, Twitter 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 Twitter will offset losses from the drop in Twitter's long position.

## DOW

### Pair trading matchups for DOW

 Ford vs. DOW BANK OF NINGBO vs. DOW Meta Platforms vs. DOW HITHINK ROYALFLUSH vs. DOW GM vs. DOW Vmware vs. DOW Microsoft Corp vs. DOW Walker Dunlop vs. DOW COSCO SHIPPING vs. DOW LINGYI ITECH 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 Twitter 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.