Correlation Between Dow and Cabot

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

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

Diversification Opportunities for Dow and Cabot

0.92

Correlation Coefficient

Dow  Cabot

Almost no diversification

The 3 months correlation between Dow and Cabot is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Cabot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cabot 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 Cabot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cabot has no effect on the direction of Dow i.e., Dow and Cabot go up and down completely randomly.

Pair Corralation between Dow and Cabot

Considering the 90-day investment horizon Dow Inc is expected to under-perform the Cabot. But the stock apears to be less risky and, when comparing its historical volatility, Dow Inc is 1.68 times less risky than Cabot. The stock trades about -0.03 of its potential returns per unit of risk. The Cabot is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  8,952  in Cabot on January 25, 2024 and sell it today you would earn a total of  386.00  from holding Cabot or generate 4.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Dow Inc  vs.  Cabot

Dow Inc

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dow Inc are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Dow is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Cabot

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cabot are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting fundamental drivers, Cabot unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dow and Cabot

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

The idea behind Dow Inc and Cabot 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 the Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.