Correlation Between Dow Jones and Diamond Hill

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

Diversification Opportunities for Dow Jones and Diamond Hill

-0.18

Correlation Coefficient

Dow Jones  Diamond Hill

Good diversification

The 3 months correlation between Dow and Diamond is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Diamond Hill Short in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamond Hill Short 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 Diamond Hill. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamond Hill Short has no effect on the direction of Dow Jones i.e., Dow Jones and Diamond Hill go up and down completely randomly.

Pair Corralation between Dow Jones and Diamond Hill

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Diamond Hill. In addition to that, Dow Jones is 11.44 times more volatile than Diamond Hill Short. It trades about -0.04 of its total potential returns per unit of risk. Diamond Hill Short is currently generating about 0.5 per unit of volatility. If you would invest  985.00  in Diamond Hill Short on December 22, 2024 and sell it today you would earn a total of  22.00  from holding Diamond Hill Short or generate 2.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Dow Jones Industrial  vs.  Diamond Hill Short

Pair Trading with Dow Jones and Diamond Hill

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

The idea behind Dow Jones Industrial and Diamond Hill Short 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 Stocks Directory module to find actively traded stocks across global markets.