# Correlation Between Vanguard and DOW

By analyzing existing cross correlation between Vanguard SP 500 and DOW, you can compare the effects of market volatilities on Vanguard 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 Vanguard with a short position of DOW. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard and DOW.

### Specify exactly 2 symbols:VSPVX^DJIAdd Two Equities

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

## Diversification Opportunities for Vanguard and DOW

 0.98 Correlation Coefficient Vanguard SP 500 DOW

### Almost no diversification

The 3 months correlation between Vanguard and DOW is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP 500 and DOW in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on DOW and Vanguard 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 Vanguard SP 500 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 Vanguard i.e., Vanguard and DOW go up and down completely randomly.

## Pair Corralation between Vanguard and DOW

Assuming the 90 days horizon Vanguard SP 500 is expected to generate 1.06 times more return on investment than DOW. However, Vanguard is 1.06 times more volatile than DOW. It trades about -0.2 of its potential returns per unit of risk. DOW is currently generating about -0.28 per unit of risk. If you would invest  32,824  in Vanguard SP 500 on September 7, 2021 and sell it today you would lose (1,279)  from holding Vanguard SP 500 or give up 3.9% of portfolio value over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Very Strong Accuracy 100.0% Values Daily Returns

## Vanguard SP 500  vs.  DOW

 Performance (%)
 Timeline

## Vanguard and DOW Volatility Contrast

 Predicted Return Density
 Returns

## DOW

### Pair trading matchups for DOW

 Salesforce vs. DOW Citigroup vs. DOW Adv Micro vs. DOW Vmware vs. DOW Ford vs. DOW Sentinelone Inc vs. DOW Alphabet vs. DOW Microsoft Corp 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 Vanguard and DOW

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

## Vanguard SP 500

### Pair trading matchups for Vanguard

The idea behind Vanguard SP 500 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

 Sentinelone Inc vs. DOW Alphabet vs. DOW Du Pont vs. DOW Microsoft Corp vs. DOW Citigroup vs. DOW Salesforce vs. DOW Visa 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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