Correlation Between Dow Jones and Cape Lambert

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

Diversification Opportunities for Dow Jones and Cape Lambert

0.25

Correlation Coefficient

Dow Jones  Cape Lambert

Modest diversification

The 3 months correlation between Dow and Cape is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Cape Lambert Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cape Lambert Resources 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 Cape Lambert. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cape Lambert Resources has no effect on the direction of Dow Jones i.e., Dow Jones and Cape Lambert go up and down completely randomly.

Pair Corralation between Dow Jones and Cape Lambert

Assuming the 90 days trading horizon Dow Jones is expected to generate 58.19 times less return on investment than Cape Lambert. But when comparing it to its historical volatility, Dow Jones Industrial is 67.94 times less risky than Cape Lambert. It trades about 0.07 of its potential returns per unit of risk. Cape Lambert Resources is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  0.14  in Cape Lambert Resources on October 6, 2024 and sell it today you would earn a total of  2.91  from holding Cape Lambert Resources or generate 2078.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.17%
Values	Daily Returns

Dow Jones Industrial  vs.  Cape Lambert Resources

Pair Trading with Dow Jones and Cape Lambert

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

The idea behind Dow Jones Industrial and Cape Lambert Resources 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.