Correlation Between Dow Jones and Balanced Portfolio

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

Diversification Opportunities for Dow Jones and Balanced Portfolio

0.93

Correlation Coefficient

Dow Jones  Balanced Portfolio

Almost no diversification

The 3 months correlation between Dow and Balanced is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Balanced Portfolio Institution in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Portfolio 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 Balanced Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Portfolio has no effect on the direction of Dow Jones i.e., Dow Jones and Balanced Portfolio go up and down completely randomly.

Pair Corralation between Dow Jones and Balanced Portfolio

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.07 times less return on investment than Balanced Portfolio. In addition to that, Dow Jones is 1.32 times more volatile than Balanced Portfolio Institutional. It trades about 0.08 of its total potential returns per unit of risk. Balanced Portfolio Institutional is currently generating about 0.11 per unit of volatility. If you would invest  3,890  in Balanced Portfolio Institutional on September 24, 2024 and sell it today you would earn a total of  1,260  from holding Balanced Portfolio Institutional or generate 32.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Balanced Portfolio Institution

Pair Trading with Dow Jones and Balanced Portfolio

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

The idea behind Dow Jones Industrial and Balanced Portfolio Institutional 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.