Correlation Between Dow Jones and GNX

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

Diversification Opportunities for Dow Jones and GNX

-0.13

Correlation Coefficient

Dow Jones  GNX

Good diversification

The 3 months correlation between Dow and GNX is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and GNX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GNX 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 GNX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GNX has no effect on the direction of Dow Jones i.e., Dow Jones and GNX go up and down completely randomly.

Pair Corralation between Dow Jones and GNX

Assuming the 90 days trading horizon Dow Jones is expected to generate 550.32 times less return on investment than GNX. But when comparing it to its historical volatility, Dow Jones Industrial is 376.52 times less risky than GNX. It trades about 0.19 of its potential returns per unit of risk. GNX is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  0.04  in GNX on September 3, 2024 and sell it today you would lose  0.00  from holding GNX or give up 1.62% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Dow Jones Industrial  vs.  GNX

Pair Trading with Dow Jones and GNX

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

The idea behind Dow Jones Industrial and GNX 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.