Correlation Between Dow Jones and Taiwan Optical

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

Diversification Opportunities for Dow Jones and Taiwan Optical

0.23

Correlation Coefficient

Dow Jones  Taiwan Optical

Modest diversification

The 3 months correlation between Dow and Taiwan is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Taiwan Optical Platform in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Optical Platform 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 Taiwan Optical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Optical Platform has no effect on the direction of Dow Jones i.e., Dow Jones and Taiwan Optical go up and down completely randomly.

Pair Corralation between Dow Jones and Taiwan Optical

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Taiwan Optical. In addition to that, Dow Jones is 2.4 times more volatile than Taiwan Optical Platform. It trades about -0.2 of its total potential returns per unit of risk. Taiwan Optical Platform is currently generating about -0.37 per unit of volatility. If you would invest  8,040  in Taiwan Optical Platform on September 28, 2024 and sell it today you would lose (200.00) from holding Taiwan Optical Platform or give up 2.49% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Dow Jones Industrial  vs.  Taiwan Optical Platform

Pair Trading with Dow Jones and Taiwan Optical

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

The idea behind Dow Jones Industrial and Taiwan Optical Platform 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.