Correlation Between Dow Jones and State Street

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

Diversification Opportunities for Dow Jones and State Street

-0.51

Correlation Coefficient

Dow Jones  State Street

Excellent diversification

The 3 months correlation between Dow and State is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and State Street Aggregate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on State Street Aggregate 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 State Street. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of State Street Aggregate has no effect on the direction of Dow Jones i.e., Dow Jones and State Street go up and down completely randomly.

Pair Corralation between Dow Jones and State Street

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.64 times less return on investment than State Street. In addition to that, Dow Jones is 1.73 times more volatile than State Street Aggregate. It trades about 0.02 of its total potential returns per unit of risk. State Street Aggregate is currently generating about 0.05 per unit of volatility. If you would invest  8,543  in State Street Aggregate on September 15, 2024 and sell it today you would earn a total of  28.00  from holding State Street Aggregate or generate 0.33% return on investment over 90 days.

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

Dow Jones Industrial  vs.  State Street Aggregate

Pair Trading with Dow Jones and State Street

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

The idea behind Dow Jones Industrial and State Street Aggregate 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.