Correlation Between Dow Jones and Top Frontier

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

Diversification Opportunities for Dow Jones and Top Frontier

-0.28

Correlation Coefficient

Dow Jones  Top Frontier

Very good diversification

The 3 months correlation between Dow and Top is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Top Frontier Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Top Frontier Investment 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 Top Frontier. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Top Frontier Investment has no effect on the direction of Dow Jones i.e., Dow Jones and Top Frontier go up and down completely randomly.

Pair Corralation between Dow Jones and Top Frontier

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 0.24 times more return on investment than Top Frontier. However, Dow Jones Industrial is 4.21 times less risky than Top Frontier. It trades about -0.06 of its potential returns per unit of risk. Top Frontier Investment is currently generating about -0.04 per unit of risk. If you would invest  4,491,065  in Dow Jones Industrial on November 28, 2024 and sell it today you would lose (128,949) from holding Dow Jones Industrial or give up 2.87% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	89.83%
Values	Daily Returns

Dow Jones Industrial  vs.  Top Frontier Investment

Pair Trading with Dow Jones and Top Frontier

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

The idea behind Dow Jones Industrial and Top Frontier Investment 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.