Correlation Between Dow Jones and Csjxx

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

Diversification Opportunities for Dow Jones and Csjxx

-0.58

Correlation Coefficient

Dow Jones  Csjxx

Excellent diversification

The 3 months correlation between Dow and Csjxx is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Csjxx in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Csjxx 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 Csjxx. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Csjxx has no effect on the direction of Dow Jones i.e., Dow Jones and Csjxx go up and down completely randomly.

Pair Corralation between Dow Jones and Csjxx

Assuming the 90 days trading horizon Dow Jones is expected to generate 49.92 times less return on investment than Csjxx. But when comparing it to its historical volatility, Dow Jones Industrial is 56.88 times less risky than Csjxx. It trades about 0.09 of its potential returns per unit of risk. Csjxx is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  519.00  in Csjxx on September 30, 2024 and sell it today you would lose (419.00) from holding Csjxx or give up 80.73% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Csjxx

Pair Trading with Dow Jones and Csjxx

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

The idea behind Dow Jones Industrial and Csjxx 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.

Check out your portfolio center.

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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.