Correlation Between Dow Jones and Advanced Drainage

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

Diversification Opportunities for Dow Jones and Advanced Drainage

-0.3

Correlation Coefficient

Dow Jones  Advanced Drainage

Very good diversification

The 3 months correlation between Dow and Advanced is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Advanced Drainage Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Drainage Systems 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 Advanced Drainage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Drainage Systems has no effect on the direction of Dow Jones i.e., Dow Jones and Advanced Drainage go up and down completely randomly.

Pair Corralation between Dow Jones and Advanced Drainage

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.78 times less return on investment than Advanced Drainage. But when comparing it to its historical volatility, Dow Jones Industrial is 3.31 times less risky than Advanced Drainage. It trades about 0.09 of its potential returns per unit of risk. Advanced Drainage Systems is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  7,359  in Advanced Drainage Systems on October 5, 2024 and sell it today you would earn a total of  3,751  from holding Advanced Drainage Systems or generate 50.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.34%
Values	Daily Returns

Dow Jones Industrial  vs.  Advanced Drainage Systems

Pair Trading with Dow Jones and Advanced Drainage

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

The idea behind Dow Jones Industrial and Advanced Drainage Systems 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.