Correlation Between Dow Jones and Australian Bond

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

Diversification Opportunities for Dow Jones and Australian Bond

0.11

Correlation Coefficient

Dow Jones  Australian Bond

Average diversification

The 3 months correlation between Dow and Australian is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Australian Bond Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Australian Bond Exchange 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 Australian Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Australian Bond Exchange has no effect on the direction of Dow Jones i.e., Dow Jones and Australian Bond go up and down completely randomly.

Pair Corralation between Dow Jones and Australian Bond

Assuming the 90 days trading horizon Dow Jones is expected to generate 11.86 times less return on investment than Australian Bond. But when comparing it to its historical volatility, Dow Jones Industrial is 8.66 times less risky than Australian Bond. It trades about 0.06 of its potential returns per unit of risk. Australian Bond Exchange is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  2.50  in Australian Bond Exchange on September 21, 2024 and sell it today you would earn a total of  1.00  from holding Australian Bond Exchange or generate 40.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.15%
Values	Daily Returns

Dow Jones Industrial  vs.  Australian Bond Exchange

Pair Trading with Dow Jones and Australian Bond

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

The idea behind Dow Jones Industrial and Australian Bond Exchange 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.