Correlation Between Dow Jones and ProShares UltraPro

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

Diversification Opportunities for Dow Jones and ProShares UltraPro

0.47

Correlation Coefficient

Dow Jones  ProShares UltraPro

Very weak diversification

The 3 months correlation between Dow and ProShares is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and ProShares UltraPro Short in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraPro Short 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 ProShares UltraPro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraPro Short has no effect on the direction of Dow Jones i.e., Dow Jones and ProShares UltraPro go up and down completely randomly.

Pair Corralation between Dow Jones and ProShares UltraPro

Assuming the 90 days trading horizon Dow Jones is expected to generate 2.04 times less return on investment than ProShares UltraPro. But when comparing it to its historical volatility, Dow Jones Industrial is 4.34 times less risky than ProShares UltraPro. It trades about 0.08 of its potential returns per unit of risk. ProShares UltraPro Short is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  5,383  in ProShares UltraPro Short on September 19, 2024 and sell it today you would earn a total of  2,046  from holding ProShares UltraPro Short or generate 38.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.79%
Values	Daily Returns

Dow Jones Industrial  vs.  ProShares UltraPro Short

Pair Trading with Dow Jones and ProShares UltraPro

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

The idea behind Dow Jones Industrial and ProShares UltraPro Short 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.