Correlation Between Dow and Sumitomo Chemical

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

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

Diversification Opportunities for Dow and Sumitomo Chemical

0.92

Correlation Coefficient

Dow  Sumitomo Chemical

Almost no diversification

The 3 months correlation between Dow and Sumitomo is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Sumitomo Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Chemical and Dow 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 Dow Inc are associated (or correlated) with Sumitomo Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Chemical has no effect on the direction of Dow i.e., Dow and Sumitomo Chemical go up and down completely randomly.

Pair Corralation between Dow and Sumitomo Chemical

Assuming the 90 days horizon Dow Inc is expected to generate 1.09 times more return on investment than Sumitomo Chemical. However, Dow is 1.09 times more volatile than Sumitomo Chemical. It trades about 0.23 of its potential returns per unit of risk. Sumitomo Chemical is currently generating about -0.02 per unit of risk. If you would invest  3,825  in Dow Inc on October 23, 2024 and sell it today you would earn a total of  194.00  from holding Dow Inc or generate 5.07% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Dow Inc  vs.  Sumitomo Chemical

Dow Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dow Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Sumitomo Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sumitomo Chemical has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Dow and Sumitomo Chemical

The main advantage of trading using opposite Dow and Sumitomo Chemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow position performs unexpectedly, Sumitomo Chemical 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 Sumitomo Chemical will offset losses from the drop in Sumitomo Chemical's long position.

The idea behind Dow Inc and Sumitomo Chemical 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.

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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 the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.