Correlation Between Dow Jones and Emerging Markets

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

Diversification Opportunities for Dow Jones and Emerging Markets

-0.31

Correlation Coefficient

Dow Jones  Emerging Markets

Very good diversification

The 3 months correlation between Dow and Emerging is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Emerging Markets Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Small 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 Emerging Markets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerging Markets Small has no effect on the direction of Dow Jones i.e., Dow Jones and Emerging Markets go up and down completely randomly.

Pair Corralation between Dow Jones and Emerging Markets

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Emerging Markets. In addition to that, Dow Jones is 1.3 times more volatile than Emerging Markets Small. It trades about -0.39 of its total potential returns per unit of risk. Emerging Markets Small is currently generating about -0.34 per unit of volatility. If you would invest  2,406  in Emerging Markets Small on October 5, 2024 and sell it today you would lose (91.00) from holding Emerging Markets Small or give up 3.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Dow Jones Industrial  vs.  Emerging Markets Small

Pair Trading with Dow Jones and Emerging Markets

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

The idea behind Dow Jones Industrial and Emerging Markets Small 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.