Correlation Between Dow Jones and SPDR Barclays

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

Diversification Opportunities for Dow Jones and SPDR Barclays

0.87

Correlation Coefficient

Dow Jones  SPDR Barclays

Very poor diversification

The 3 months correlation between Dow and SPDR is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and SPDR Barclays Euro in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Barclays Euro 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 SPDR Barclays. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Barclays Euro has no effect on the direction of Dow Jones i.e., Dow Jones and SPDR Barclays go up and down completely randomly.

Pair Corralation between Dow Jones and SPDR Barclays

Assuming the 90 days trading horizon Dow Jones is expected to generate 3.61 times less return on investment than SPDR Barclays. In addition to that, Dow Jones is 3.8 times more volatile than SPDR Barclays Euro. It trades about 0.02 of its total potential returns per unit of risk. SPDR Barclays Euro is currently generating about 0.25 per unit of volatility. If you would invest  5,382  in SPDR Barclays Euro on September 15, 2024 and sell it today you would earn a total of  42.00  from holding SPDR Barclays Euro or generate 0.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Dow Jones Industrial  vs.  SPDR Barclays Euro

Pair Trading with Dow Jones and SPDR Barclays

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

The idea behind Dow Jones Industrial and SPDR Barclays Euro 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.