Correlation Between DOW JONES and Encore Wire

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

Diversification Opportunities for DOW JONES and Encore Wire

0.34
  Correlation Coefficient

Weak diversification

The 3 months correlation between DOW JONES and Encore is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding DOW JONES INDUSTRIAL and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire and DOW JONES 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 JONES INDUSTRIAL are associated (or correlated) with Encore Wire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Wire has no effect on the direction of DOW JONES i.e., DOW JONES and Encore Wire go up and down completely randomly.
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Pair Corralation between DOW JONES and Encore Wire

Given the investment horizon of 90 days DOW JONES is expected to generate 2.73 times less return on investment than Encore Wire. But when comparing it to its historical volatility, DOW JONES INDUSTRIAL is 1.96 times less risky than Encore Wire. It trades about 0.43 of its potential returns per unit of risk. Encore Wire is currently generating about 0.59 of returns per unit of risk over similar time horizon. If you would invest  13,340  in Encore Wire on November 2, 2022 and sell it today you would earn a total of  2,605  from holding Encore Wire or generate 19.53% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy52.63%
ValuesDaily Returns

DOW JONES INDUSTRIAL  vs.  Encore Wire

 Performance (%) 
       Timeline  

DOW JONES and Encore Wire Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with DOW JONES and Encore Wire

The main advantage of trading using opposite DOW JONES and Encore Wire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW JONES position performs unexpectedly, Encore Wire 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 Encore Wire will offset losses from the drop in Encore Wire's long position.
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The idea behind DOW JONES INDUSTRIAL and Encore Wire 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.
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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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.

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