Correlation Between Dow Jones and Ishares Municipal

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

Diversification Opportunities for Dow Jones and Ishares Municipal

0.2

Correlation Coefficient

Dow Jones  Ishares Municipal

Modest diversification

The 3 months correlation between Dow and Ishares is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Ishares Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Municipal Bond 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 Ishares Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Municipal Bond has no effect on the direction of Dow Jones i.e., Dow Jones and Ishares Municipal go up and down completely randomly.

Pair Corralation between Dow Jones and Ishares Municipal

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Ishares Municipal. In addition to that, Dow Jones is 3.76 times more volatile than Ishares Municipal Bond. It trades about -0.04 of its total potential returns per unit of risk. Ishares Municipal Bond is currently generating about 0.04 per unit of volatility. If you would invest  1,088  in Ishares Municipal Bond on December 22, 2024 and sell it today you would earn a total of  6.00  from holding Ishares Municipal Bond or generate 0.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Dow Jones Industrial  vs.  Ishares Municipal Bond

Pair Trading with Dow Jones and Ishares Municipal

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

The idea behind Dow Jones Industrial and Ishares Municipal Bond 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 Global Correlations module to find global opportunities by holding instruments from different markets.