Correlation Between DOW and Wells Fargo

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

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

Diversification Opportunities for DOW and Wells Fargo

0.74
  Correlation Coefficient
DOW
Wells Fargo Growth

Poor diversification

The 3 months correlation between DOW and Wells is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Wells Fargo Growth in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Wells Fargo Growth 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 Wells Fargo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wells Fargo Growth has no effect on the direction of DOW i.e., DOW and Wells Fargo go up and down completely randomly.
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Pair Corralation between DOW and Wells Fargo

Given the investment horizon of 90 days DOW is expected to generate 1.69 times more return on investment than Wells Fargo. However, DOW is 1.69 times more volatile than Wells Fargo Growth. It trades about 0.04 of its potential returns per unit of risk. Wells Fargo Growth is currently generating about 0.04 per unit of risk. If you would invest  2,709,072  in DOW on July 19, 2021 and sell it today you would earn a total of  820,404  from holding DOW or generate 30.28% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy99.8%
ValuesDaily Returns

DOW  vs.  Wells Fargo Growth

 Performance (%) 
      Timeline 

DOW and Wells Fargo Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Flowers Foods vs. DOW
Upstart Holdings vs. DOW
Vmware vs. DOW
Facebook vs. DOW
Main Street vs. DOW
Walker Dunlop vs. DOW
Salesforce vs. DOW
Square vs. DOW
Citigroup vs. DOW
High Dividend 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 Wells Fargo

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

DOW

Pair trading matchups for DOW

Walker Dunlop vs. DOW
Square vs. DOW
Sentinelone Inc vs. DOW
Vmware vs. DOW
Realty Income vs. DOW
Flowers Foods vs. DOW
High Dividend vs. DOW
Upstart Holdings vs. DOW
Visa vs. DOW
Main Street vs. DOW
Microsoft Corp 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 Wells Fargo Growth 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 Fund Screener module to find activelly-traded funds from around the world traded on over 30 global exchanges.

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