Correlation Between International Business and DOW

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

Diversification Opportunities for International Business and DOW

-0.48
  Correlation Coefficient

Very good diversification

The 3 months correlation between International and DOW is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and International Business 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 International Business Machines 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 International Business i.e., International Business and DOW go up and down completely randomly.
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Pair Corralation between International Business and DOW

Considering the 90-day investment horizon International Business Machines is expected to generate 1.52 times more return on investment than DOW. However, International Business is 1.52 times more volatile than DOW. It trades about 0.05 of its potential returns per unit of risk. DOW is currently generating about 0.04 per unit of risk. If you would invest  9,995  in International Business Machines on March 31, 2022 and sell it today you would earn a total of  3,993  from holding International Business Machines or generate 39.95% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

International Business Machine  vs.  DOW

 Performance (%) 
      Timeline 

International Business and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

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Star Bulk vs. DOW
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Valhi vs. DOW
Gran Tierra vs. DOW
Kroger vs. DOW
Genie Energy vs. DOW
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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 International Business and DOW

The main advantage of trading using opposite International Business and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Business 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.
The idea behind International Business Machines 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

Gran Tierra vs. DOW
Kroger vs. DOW
Pacific Gas vs. DOW
Star Bulk vs. DOW
Mesabi Trust vs. DOW
Stealthgas vs. DOW
Burford Capital vs. DOW
Geely Automobile vs. DOW
Valhi vs. DOW
Genie Energy vs. DOW
Walgreens Boots vs. DOW
U S 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.

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