Correlation Between Dow Jones and Source Markets

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

Diversification Opportunities for Dow Jones and Source Markets

-0.15

Correlation Coefficient

Dow Jones  Source Markets

Good diversification

The 3 months correlation between Dow and Source is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Source Markets plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source Markets 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 Source Markets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source Markets plc has no effect on the direction of Dow Jones i.e., Dow Jones and Source Markets go up and down completely randomly.

Pair Corralation between Dow Jones and Source Markets

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Source Markets. But the index apears to be less risky and, when comparing its historical volatility, Dow Jones Industrial is 1.04 times less risky than Source Markets. The index trades about -0.19 of its potential returns per unit of risk. The Source Markets plc is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  27,150  in Source Markets plc on October 15, 2024 and sell it today you would lose (300.00) from holding Source Markets plc or give up 1.1% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	84.21%
Values	Daily Returns

Dow Jones Industrial  vs.  Source Markets plc

Pair Trading with Dow Jones and Source Markets

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

The idea behind Dow Jones Industrial and Source Markets 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.

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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.