# Correlation Between Shanghai and DOW

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

## Diversification Opportunities for Shanghai and DOW

 -0.29 Correlation Coefficient

### Very good diversification

The 3 months correlation between Shanghai and DOW is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Shanghai 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 Shanghai are associated (or correlated) with DOW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW has no effect on the direction of Shanghai i.e., Shanghai and DOW go up and down completely randomly.

## Pair Corralation between Shanghai and DOW

Assuming the 90 days trading horizon Shanghai is expected to generate 0.62 times more return on investment than DOW. However, Shanghai is 1.62 times less risky than DOW. It trades about 0.35 of its potential returns per unit of risk. DOW is currently generating about -0.1 per unit of risk. If you would invest  300,156  in Shanghai on April 5, 2022 and sell it today you would earn a total of  40,387  from holding Shanghai or generate 13.46% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Against Strength Insignificant Accuracy 97.62% Values Daily Returns

## Shanghai  vs.  DOW

 Performance (%)
 Timeline

## Shanghai and DOW Volatility Contrast

 Predicted Return Density
 Returns

## Shanghai

### Pair trading matchups for Shanghai

 Liquidia Corp vs. Shanghai MITIE GROUP vs. Shanghai Seneca Foods vs. Shanghai Solo Brands vs. Shanghai Novan vs. Shanghai Alphabet vs. Shanghai Arca Biopharma vs. Shanghai Vmware vs. Shanghai Sentinelone Inc vs. Shanghai GLAXOSMITHKLINE PLC vs. Shanghai Cyclacel Pharmaceuti vs. Shanghai Context Therapeutics vs. Shanghai
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 Shanghai 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. Shanghai'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, Shanghai'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 Shanghai.

## DOW

### Pair trading matchups for DOW

 Context Therapeutics vs. DOW Arca Biopharma vs. DOW Vmware vs. DOW BP PLC vs. DOW Calyxt vs. DOW Seneca Foods vs. DOW Cyclacel Pharmaceuti vs. DOW Novan vs. DOW Alphabet vs. DOW RENEWI PLC vs. DOW Solo Brands 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 Shanghai and DOW

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

## Shanghai

### Pair trading matchups for Shanghai

 Calyxt vs. Shanghai Seneca Foods vs. Shanghai International Business vs. Shanghai Alphabet vs. Shanghai BP PLC vs. Shanghai Sentinelone Inc vs. Shanghai Visa vs. Shanghai Alzamend Neuro vs. Shanghai Vmware vs. Shanghai ATT vs. Shanghai GLAXOSMITHKLINE PLC vs. Shanghai Liquidia Corp vs. Shanghai
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 Shanghai 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. Shanghai'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, Shanghai'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 Shanghai.
The idea behind Shanghai and DOW 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.

## DOW

### Pair trading matchups for DOW

 Seneca Foods vs. DOW International Business vs. DOW GLAXOSMITHKLINE PLC vs. DOW RENEWI PLC vs. DOW Arca Biopharma vs. DOW MITIE GROUP vs. DOW Cyclacel Pharmaceuti vs. DOW Vmware vs. DOW BP PLC vs. DOW Alphabet vs. DOW Novan 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.
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 Probability Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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