Correlation Between Dave and DOW JONES

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

Diversification Opportunities for Dave and DOW JONES

-0.05
  Correlation Coefficient

Good diversification

The 3 months correlation between Dave and DOW JONES is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Dave Inc and DOW JONES INDUSTRIAL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW JONES INDUSTRIAL and Dave 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 Dave Inc are associated (or correlated) with DOW JONES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW JONES INDUSTRIAL has no effect on the direction of Dave i.e., Dave and DOW JONES go up and down completely randomly.
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Pair Corralation between Dave and DOW JONES

Given the investment horizon of 90 days Dave Inc is expected to generate 8.5 times more return on investment than DOW JONES. However, Dave is 8.5 times more volatile than DOW JONES INDUSTRIAL. It trades about 0.14 of its potential returns per unit of risk. DOW JONES INDUSTRIAL is currently generating about 0.22 per unit of risk. If you would invest  30.00  in Dave Inc on September 11, 2022 and sell it today you would earn a total of  5.00  from holding Dave Inc or generate 16.67% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy71.43%
ValuesDaily Returns

Dave Inc  vs.  DOW JONES INDUSTRIAL

 Performance (%) 
       Timeline  

Dave and DOW JONES Volatility Contrast

   Predicted Return Density   
       Returns  

DOW JONES INDUSTRIAL

Pair trading matchups for DOW JONES

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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.

Pair Trading with Dave and DOW JONES

The main advantage of trading using opposite Dave and DOW JONES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dave position performs unexpectedly, DOW JONES 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 JONES will offset losses from the drop in DOW JONES's long position.
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The idea behind Dave Inc and DOW JONES INDUSTRIAL 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.
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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.
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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.

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