Correlation Between World Ex and Dow Jones

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

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

Diversification Opportunities for World Ex and Dow Jones

-0.02

Correlation Coefficient

World Ex  Dow Jones

Good diversification

The 3 months correlation between World and Dow is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding World Ex Core and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial and World Ex 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 World Ex Core are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of World Ex i.e., World Ex and Dow Jones go up and down completely randomly.

Pair Corralation between World Ex and Dow Jones

Assuming the 90 days horizon World Ex Core is expected to generate 0.9 times more return on investment than Dow Jones. However, World Ex Core is 1.11 times less risky than Dow Jones. It trades about 0.17 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about -0.04 per unit of risk. If you would invest  1,306  in World Ex Core on December 21, 2024 and sell it today you would earn a total of  104.00  from holding World Ex Core or generate 7.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.33%
Values	Daily Returns

World Ex Core  vs.  Dow Jones Industrial

Pair Trading with World Ex and Dow Jones

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

The idea behind World Ex Core and Dow Jones Industrial 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.