Correlation Between Dow Jones and PFIZER

Can any of the company-specific risk be diversified away by investing in both Dow Jones and PFIZER 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 PFIZER 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 PFIZER INC 4125, you can compare the effects of market volatilities on Dow Jones and PFIZER 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 PFIZER. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and PFIZER.

Diversification Opportunities for Dow Jones and PFIZER

-0.23

Correlation Coefficient

Dow Jones  PFIZER

Very good diversification

The 3 months correlation between Dow and PFIZER is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and PFIZER INC 4125 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PFIZER INC 4125 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 PFIZER. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PFIZER INC 4125 has no effect on the direction of Dow Jones i.e., Dow Jones and PFIZER go up and down completely randomly.

Pair Corralation between Dow Jones and PFIZER

Assuming the 90 days trading horizon Dow Jones is expected to generate 36.23 times less return on investment than PFIZER. But when comparing it to its historical volatility, Dow Jones Industrial is 65.64 times less risky than PFIZER. It trades about 0.08 of its potential returns per unit of risk. PFIZER INC 4125 is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  8,937  in PFIZER INC 4125 on September 24, 2024 and sell it today you would lose (598.00) from holding PFIZER INC 4125 or give up 6.69% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	91.95%
Values	Daily Returns

Dow Jones Industrial  vs.  PFIZER INC 4125

Pair Trading with Dow Jones and PFIZER

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

The idea behind Dow Jones Industrial and PFIZER INC 4125 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.