Correlation Between Fidelity 500 and DOW

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Can any of the company-specific risk be diversified away by investing in both Fidelity 500 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 Fidelity 500 and DOW into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Fidelity 500 Index and DOW, you can compare the effects of market volatilities on Fidelity 500 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 Fidelity 500 with a short position of DOW. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fidelity 500 and DOW.

Diversification Opportunities for Fidelity 500 and DOW

0.97
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Fidelity and DOW is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Fidelity 500 Index and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Fidelity 500 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 Fidelity 500 Index 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 Fidelity 500 i.e., Fidelity 500 and DOW go up and down completely randomly.
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Pair Corralation between Fidelity 500 and DOW

Assuming the 90 days horizon Fidelity 500 Index is expected to under-perform the DOW. In addition to that, Fidelity 500 is 1.26 times more volatile than DOW. It trades about -0.25 of its total potential returns per unit of risk. DOW is currently generating about -0.27 per unit of volatility. If you would invest  3,479,276  in DOW on February 20, 2022 and sell it today you would lose (353,086)  from holding DOW or give up 10.15% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy95.65%
ValuesDaily Returns

Fidelity 500 Index  vs.  DOW

 Performance (%) 
      Timeline 

Fidelity 500 and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

Fidelity 500 Index

Pair trading matchups for Fidelity 500

DOW

Pair trading matchups for DOW

Vmware vs. DOW
Fidelity Info vs. DOW
Palo Alto vs. DOW
Accenture Plc vs. DOW
Servicenow vs. DOW
Nxp Semiconductors vs. DOW
Apple vs. DOW
Microsoft Corp vs. DOW
Salesforce vs. DOW
Citigroup vs. DOW
Zendesk 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 Fidelity 500 and DOW

The main advantage of trading using opposite Fidelity 500 and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fidelity 500 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.

Fidelity 500 Index

Pair trading matchups for Fidelity 500

The idea behind Fidelity 500 Index 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

Nxp Semiconductors vs. DOW
Palo Alto vs. DOW
Ford vs. DOW
Accenture Plc vs. DOW
Dupont Denemours vs. DOW
Veeco Instrument vs. DOW
Vmware vs. DOW
Microsoft Corp vs. DOW
Applied Materials vs. DOW
Salesforce vs. DOW
Global X vs. DOW
International Business 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.

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