Correlation Between Dow Jones and Pentair Plc

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

Diversification Opportunities for Dow Jones and Pentair Plc

0.46

Correlation Coefficient

Dow Jones  Pentair Plc

Very weak diversification

The 3 months correlation between Dow and Pentair is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Pentair plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pentair plc 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 Pentair Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pentair plc has no effect on the direction of Dow Jones i.e., Dow Jones and Pentair Plc go up and down completely randomly.

Pair Corralation between Dow Jones and Pentair Plc

Assuming the 90 days trading horizon Dow Jones is expected to generate 6.82 times less return on investment than Pentair Plc. But when comparing it to its historical volatility, Dow Jones Industrial is 1.81 times less risky than Pentair Plc. It trades about 0.03 of its potential returns per unit of risk. Pentair plc is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  56,000  in Pentair plc on October 22, 2024 and sell it today you would earn a total of  5,380  from holding Pentair plc or generate 9.61% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.16%
Values	Daily Returns

Dow Jones Industrial  vs.  Pentair plc

Pair Trading with Dow Jones and Pentair Plc

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

The idea behind Dow Jones Industrial and Pentair plc 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.