Correlation Between Dow Jones and Cathay Financial

Can any of the company-specific risk be diversified away by investing in both Dow Jones and Cathay Financial 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 Cathay Financial 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 Cathay Financial Holding, you can compare the effects of market volatilities on Dow Jones and Cathay Financial 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 Cathay Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Cathay Financial.

Diversification Opportunities for Dow Jones and Cathay Financial

-0.58

Correlation Coefficient

Dow Jones  Cathay Financial

Excellent diversification

The 3 months correlation between Dow and Cathay is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Cathay Financial Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Financial Holding 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 Cathay Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Financial Holding has no effect on the direction of Dow Jones i.e., Dow Jones and Cathay Financial go up and down completely randomly.

Pair Corralation between Dow Jones and Cathay Financial

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Cathay Financial. But the index apears to be less risky and, when comparing its historical volatility, Dow Jones Industrial is 1.57 times less risky than Cathay Financial. The index trades about -0.04 of its potential returns per unit of risk. The Cathay Financial Holding is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  6,760  in Cathay Financial Holding on December 1, 2024 and sell it today you would earn a total of  80.00  from holding Cathay Financial Holding or generate 1.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	93.44%
Values	Daily Returns

Dow Jones Industrial  vs.  Cathay Financial Holding

Pair Trading with Dow Jones and Cathay Financial

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

The idea behind Dow Jones Industrial and Cathay Financial Holding 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.