Correlation Between Dow Jones and Standard Chemical

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

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

Diversification Opportunities for Dow Jones and Standard Chemical

-0.63

Correlation Coefficient

Dow Jones  Standard Chemical

Excellent diversification

The 3 months correlation between Dow and Standard is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Standard Chemical Pharmaceutic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Standard Chemical and Dow Jones 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 Jones Industrial are associated (or correlated) with Standard Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Standard Chemical has no effect on the direction of Dow Jones i.e., Dow Jones and Standard Chemical go up and down completely randomly.

Pair Corralation between Dow Jones and Standard Chemical

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Standard Chemical. In addition to that, Dow Jones is 1.27 times more volatile than Standard Chemical Pharmaceutical. It trades about -0.04 of its total potential returns per unit of risk. Standard Chemical Pharmaceutical is currently generating about -0.01 per unit of volatility. If you would invest  6,170  in Standard Chemical Pharmaceutical on December 30, 2024 and sell it today you would lose (40.00) from holding Standard Chemical Pharmaceutical or give up 0.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	91.94%
Values	Daily Returns

Dow Jones Industrial  vs.  Standard Chemical Pharmaceutic

Pair Trading with Dow Jones and Standard Chemical

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

The idea behind Dow Jones Industrial and Standard Chemical Pharmaceutical 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.

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 the Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.