Correlation Between Dow Jones and Pace Select

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

Diversification Opportunities for Dow Jones and Pace Select

0.48

Correlation Coefficient

Dow Jones  Pace Select

Very weak diversification

The 3 months correlation between Dow and Pace is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Pace Select Advisors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pace Select Advisors 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 Pace Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pace Select Advisors has no effect on the direction of Dow Jones i.e., Dow Jones and Pace Select go up and down completely randomly.

Pair Corralation between Dow Jones and Pace Select

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 2.87 times more return on investment than Pace Select. However, Dow Jones is 2.87 times more volatile than Pace Select Advisors. It trades about 0.09 of its potential returns per unit of risk. Pace Select Advisors is currently generating about 0.06 per unit of risk. If you would invest  3,933,185  in Dow Jones Industrial on September 30, 2024 and sell it today you would earn a total of  366,036  from holding Dow Jones Industrial or generate 9.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.22%
Values	Daily Returns

Dow Jones Industrial  vs.  Pace Select Advisors

Pair Trading with Dow Jones and Pace Select

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

The idea behind Dow Jones Industrial and Pace Select Advisors 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.