Correlation Between Tencent Holdings and DOW

By analyzing existing cross correlation between Tencent Holdings ADR and DOW, you can compare the effects of market volatilities on Tencent Holdings 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 Tencent Holdings with a short position of DOW. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tencent Holdings and DOW.

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

Diversification Opportunities for Tencent Holdings and DOW

-0.38
  Correlation Coefficient
Tencent Holdings ADR
DOW

Very good diversification

The 3 months correlation between TCEHY Tencent and DJI DOW is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding Tencent Holdings ADR and DOW in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on DOW and Tencent Holdings 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 Tencent Holdings ADR 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 Tencent Holdings i.e., Tencent Holdings and DOW go up and down completely randomly.
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Pair Corralation between Tencent Holdings and DOW

Assuming the 90 days horizon Tencent Holdings ADR is expected to under-perform the DOW. In addition to that, Tencent Holdings is 3.35 times more volatile than DOW. It trades about -0.02 of its total potential returns per unit of risk. DOW is currently generating about 0.07 per unit of volatility. If you would invest  3,242,315  in DOW on March 23, 2021 and sell it today you would earn a total of  86,693  from holding DOW or generate 2.67% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Tencent Holdings ADR  vs.  DOW

 Performance (%) 
      Timeline 

Tencent Holdings and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

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Energy Recovery 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 Tencent Holdings and DOW

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

Marine Harvest vs. DOW
NL Industries vs. DOW
Energy Recovery vs. DOW
Microsoft Corp vs. DOW
Du Pont vs. DOW
Vmware vs. DOW
Salesforce vs. DOW
CenturyLink vs. DOW
Omega Healthcare vs. DOW
Banco Santander vs. DOW
Ehang Holdings 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.

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