Correlation Between FTSE All-World and DOW

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

Diversification Opportunities for FTSE All-World and DOW

0.89
  Correlation Coefficient

Very poor diversification

The 3 months correlation between FTSE All-World and DOW is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding FTSE All-World Ex-US and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and FTSE All-World 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 FTSE All-World Ex-US 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 FTSE All-World i.e., FTSE All-World and DOW go up and down completely randomly.
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Pair Corralation between FTSE All-World and DOW

Considering the 90-day investment horizon FTSE All-World Ex-US is expected to generate 1.04 times more return on investment than DOW. However, FTSE All-World is 1.04 times more volatile than DOW. It trades about 0.0 of its potential returns per unit of risk. DOW is currently generating about -0.05 per unit of risk. If you would invest  11,427  in FTSE All-World Ex-US on February 26, 2022 and sell it today you would lose (49.00)  from holding FTSE All-World Ex-US or give up 0.43% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

FTSE All-World Ex-US  vs.  DOW

 Performance (%) 
      Timeline 

FTSE All-World and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Microsoft Corp vs. DOW
Visa vs. DOW
Vmware vs. DOW
Ford vs. DOW
BANK OF NINGBO vs. DOW
LINGYI ITECH vs. DOW
Atlassian Cls vs. DOW
Citigroup vs. DOW
GM vs. DOW
Meta Platforms vs. DOW
Sentinelone Inc 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 FTSE All-World and DOW

The main advantage of trading using opposite FTSE All-World and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if FTSE All-World 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 FTSE All-World Ex-US 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

Microsoft Corp vs. DOW
Salesforce vs. DOW
Vmware vs. DOW
Walker Dunlop vs. DOW
Atlassian Cls vs. DOW
Sentinelone Inc vs. DOW
BANK OF NINGBO vs. DOW
Ford vs. DOW
LINGYI ITECH vs. DOW
Citigroup vs. DOW
Meta Platforms 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.

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