Correlation Between Dow Jones and KODEX SP500TR

Can any of the company-specific risk be diversified away by investing in both Dow Jones and KODEX SP500TR 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 KODEX SP500TR 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 KODEX SP500TR, you can compare the effects of market volatilities on Dow Jones and KODEX SP500TR 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 KODEX SP500TR. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and KODEX SP500TR.

Diversification Opportunities for Dow Jones and KODEX SP500TR

0.4

Correlation Coefficient

Dow Jones  KODEX SP500TR

Very weak diversification

The 3 months correlation between Dow and KODEX is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and KODEX SP500TR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KODEX SP500TR 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 KODEX SP500TR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KODEX SP500TR has no effect on the direction of Dow Jones i.e., Dow Jones and KODEX SP500TR go up and down completely randomly.

Pair Corralation between Dow Jones and KODEX SP500TR

Assuming the 90 days trading horizon Dow Jones is expected to generate 2.48 times less return on investment than KODEX SP500TR. But when comparing it to its historical volatility, Dow Jones Industrial is 1.12 times less risky than KODEX SP500TR. It trades about 0.07 of its potential returns per unit of risk. KODEX SP500TR is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,101,500  in KODEX SP500TR on October 12, 2024 and sell it today you would earn a total of  870,500  from holding KODEX SP500TR or generate 79.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.77%
Values	Daily Returns

Dow Jones Industrial  vs.  KODEX SP500TR

Pair Trading with Dow Jones and KODEX SP500TR

The main advantage of trading using opposite Dow Jones and KODEX SP500TR positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, KODEX SP500TR 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 KODEX SP500TR will offset losses from the drop in KODEX SP500TR's long position.

The idea behind Dow Jones Industrial and KODEX SP500TR 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.