Correlation Between Dow Jones and Formula

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

Diversification Opportunities for Dow Jones and Formula

-0.43

Correlation Coefficient

Dow Jones  Formula

Very good diversification

The 3 months correlation between Dow and Formula is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Formula in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formula 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 Formula. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formula has no effect on the direction of Dow Jones i.e., Dow Jones and Formula go up and down completely randomly.

Pair Corralation between Dow Jones and Formula

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Formula. But the index apears to be less risky and, when comparing its historical volatility, Dow Jones Industrial is 2.27 times less risky than Formula. The index trades about -0.04 of its potential returns per unit of risk. The Formula is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  3,035,000  in Formula on December 30, 2024 and sell it today you would earn a total of  215,000  from holding Formula or generate 7.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	83.87%
Values	Daily Returns

Dow Jones Industrial  vs.  Formula

Pair Trading with Dow Jones and Formula

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

The idea behind Dow Jones Industrial and Formula 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.