# Correlation Between Novan and DOW

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

## Diversification Opportunities for Novan and DOW

 0.72 Correlation Coefficient

### Poor diversification

The 3 months correlation between Novan and DOW is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Novan Inc and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Novan 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 Novan Inc 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 Novan i.e., Novan and DOW go up and down completely randomly.

## Pair Corralation between Novan and DOW

Given the investment horizon of 90 days Novan Inc is expected to generate 3.65 times more return on investment than DOW. However, Novan is 3.65 times more volatile than DOW. It trades about 0.33 of its potential returns per unit of risk. DOW is currently generating about 0.47 per unit of risk. If you would invest  243.00  in Novan Inc on May 17, 2022 and sell it today you would earn a total of  58.00  from holding Novan Inc or generate 23.87% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Significant Accuracy 100.0% Values Daily Returns

## Novan Inc  vs.  DOW

 Performance (%)
 Timeline

## Novan and DOW Volatility Contrast

 Predicted Return Density
 Returns

## DOW

### Pair trading matchups for DOW

 Boeing vs. DOW Amazon vs. DOW Salesforce vs. DOW Equinix vs. DOW Vmware vs. DOW Dupont Denemours vs. DOW Sentinelone Inc vs. DOW Wex vs. DOW Qualcomm vs. DOW Walker Dunlop vs. DOW Graphic Packaging vs. DOW Ford 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 Novan and DOW

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

## Novan Inc

### Pair trading matchups for Novan

The idea behind Novan Inc 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

 Equinix vs. DOW Visa vs. DOW Oracle vs. DOW Wex vs. DOW Tenneco Automotive vs. DOW Salesforce vs. DOW Walker Dunlop vs. DOW Aspen Technology vs. DOW Amazon vs. DOW Ford vs. DOW Dupont Denemours 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 Transaction History module to view history of all your transactions and understand their impact on performance.

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