Correlation Between Dow Jones and Direxion

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

Diversification Opportunities for Dow Jones and Direxion

-0.53

Correlation Coefficient

Dow Jones  Direxion

Excellent diversification

The 3 months correlation between Dow and Direxion is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Direxion in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direxion 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 Direxion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direxion has no effect on the direction of Dow Jones i.e., Dow Jones and Direxion go up and down completely randomly.

Pair Corralation between Dow Jones and Direxion

If you would invest  4,338,960  in Dow Jones Industrial on September 18, 2024 and sell it today you would earn a total of  32,788  from holding Dow Jones Industrial or generate 0.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	5.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Direxion

Pair Trading with Dow Jones and Direxion

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

The idea behind Dow Jones Industrial and Direxion 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.