Correlation Between Dow Jones and Capital World

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

Diversification Opportunities for Dow Jones and Capital World

0.8

Correlation Coefficient

Dow Jones  Capital World

Very poor diversification

The 3 months correlation between Dow and Capital is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Capital World Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital World Growth 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 Capital World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital World Growth has no effect on the direction of Dow Jones i.e., Dow Jones and Capital World go up and down completely randomly.

Pair Corralation between Dow Jones and Capital World

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Capital World. But the index apears to be less risky and, when comparing its historical volatility, Dow Jones Industrial is 1.02 times less risky than Capital World. The index trades about -0.02 of its potential returns per unit of risk. The Capital World Growth is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  6,388  in Capital World Growth on December 27, 2024 and sell it today you would earn a total of  44.00  from holding Capital World Growth or generate 0.69% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Capital World Growth

Pair Trading with Dow Jones and Capital World

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

The idea behind Dow Jones Industrial and Capital World Growth 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.