Correlation Between Dow Jones and Ultra-small Company

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

Diversification Opportunities for Dow Jones and Ultra-small Company

0.83

Correlation Coefficient

Dow Jones  Ultra-small Company

Very poor diversification

The 3 months correlation between Dow and Ultra-small is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Ultra Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra-small Company 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 Ultra-small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra-small Company has no effect on the direction of Dow Jones i.e., Dow Jones and Ultra-small Company go up and down completely randomly.

Pair Corralation between Dow Jones and Ultra-small Company

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 0.57 times more return on investment than Ultra-small Company. However, Dow Jones Industrial is 1.76 times less risky than Ultra-small Company. It trades about -0.04 of its potential returns per unit of risk. Ultra Small Pany Fund is currently generating about -0.12 per unit of risk. If you would invest  4,257,373  in Dow Jones Industrial on December 29, 2024 and sell it today you would lose (98,983) from holding Dow Jones Industrial or give up 2.32% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Ultra Small Pany Fund

Pair Trading with Dow Jones and Ultra-small Company

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

The idea behind Dow Jones Industrial and Ultra Small Pany Fund 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.