Correlation Between Dow and Air Products

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

Diversification Opportunities for Dow and Air Products

0.38
  Correlation Coefficient

Weak diversification

The 3 months correlation between Dow and Air Products is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Air Products And in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Air Products And 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 Inc are associated (or correlated) with Air Products. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air Products And has no effect on the direction of Dow i.e., Dow and Air Products go up and down completely randomly.

Pair Corralation between Dow and Air Products

Considering the 90-day investment horizon Dow Inc is expected to generate 1.02 times more return on investment than Air Products. However, Dow is 1.02 times more volatile than Air Products And. It trades about 0.12 of its potential returns per unit of risk. Air Products And is currently generating about -0.1 per unit of risk. If you would invest  5,597  in Dow Inc on February 17, 2022 and sell it today you would earn a total of  1,400  from holding Dow Inc or generate 25.01% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy99.19%
ValuesDaily Returns

Dow Inc  vs.  Air Products And

 Performance (%) 
      Timeline 
Dow Inc 
Dow Performance
10 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Dow Inc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Dow showed solid returns over the last few months and may actually be approaching a breakup point.

Dow Price Channel

Air Products And 
Air Products Performance
0 of 100
Over the last 90 days Air Products And has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Air Products is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Air Products Price Channel

Dow and Air Products Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with Dow and Air Products

The main advantage of trading using opposite Dow and Air Products positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow position performs unexpectedly, Air Products 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 Air Products will offset losses from the drop in Air Products' long position.
The idea behind Dow Inc and Air Products And 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.

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