Correlation Between MP Materials and DOW

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

Diversification Opportunities for MP Materials and DOW

0.57
  Correlation Coefficient

Very weak diversification

The 3 months correlation between MP Materials and DOW is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding MP Materials Corp and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and MP Materials 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 MP Materials Corp 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 MP Materials i.e., MP Materials and DOW go up and down completely randomly.
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Pair Corralation between MP Materials and DOW

Allowing for the 90-day total investment horizon MP Materials Corp is expected to generate 4.85 times more return on investment than DOW. However, MP Materials is 4.85 times more volatile than DOW. It trades about 0.07 of its potential returns per unit of risk. DOW is currently generating about 0.04 per unit of risk. If you would invest  1,200  in MP Materials Corp on May 13, 2022 and sell it today you would earn a total of  2,582  from holding MP Materials Corp or generate 215.17% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

MP Materials Corp  vs.  DOW

 Performance (%) 
       Timeline  

MP Materials and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Ezcorp vs. DOW
First Citizens vs. DOW
Erie Indemnity vs. DOW
Nasdaq 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 MP Materials and DOW

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

Ezcorp vs. DOW
Erie Indemnity vs. DOW
Bancfirst Corp vs. DOW
Starbucks Corp vs. DOW
Home Bancshares vs. DOW
Bgc Partners 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.

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