Correlation Between Dow Jones and Elanco

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

Diversification Opportunities for Dow Jones and Elanco

-0.04

Correlation Coefficient

Dow Jones  Elanco

Good diversification

The 3 months correlation between Dow and Elanco is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Elanco Animal Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Elanco Animal Health 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 Elanco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Elanco Animal Health has no effect on the direction of Dow Jones i.e., Dow Jones and Elanco go up and down completely randomly.

Pair Corralation between Dow Jones and Elanco

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Elanco. In addition to that, Dow Jones is 2.21 times more volatile than Elanco Animal Health. It trades about -0.03 of its total potential returns per unit of risk. Elanco Animal Health is currently generating about -0.03 per unit of volatility. If you would invest  10,288  in Elanco Animal Health on December 25, 2024 and sell it today you would lose (70.00) from holding Elanco Animal Health or give up 0.68% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

Dow Jones Industrial  vs.  Elanco Animal Health

Pair Trading with Dow Jones and Elanco

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

The idea behind Dow Jones Industrial and Elanco Animal Health 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.