Correlation Between Dow Jones and Vanguard Lifestrategy

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

Diversification Opportunities for Dow Jones and Vanguard Lifestrategy

0.75

Correlation Coefficient

Dow Jones  Vanguard Lifestrategy

Poor diversification

The 3 months correlation between Dow and Vanguard is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Vanguard Lifestrategy Moderate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Lifestrategy 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 Vanguard Lifestrategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Lifestrategy has no effect on the direction of Dow Jones i.e., Dow Jones and Vanguard Lifestrategy go up and down completely randomly.

Pair Corralation between Dow Jones and Vanguard Lifestrategy

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the Vanguard Lifestrategy. In addition to that, Dow Jones is 1.58 times more volatile than Vanguard Lifestrategy Moderate. It trades about -0.04 of its total potential returns per unit of risk. Vanguard Lifestrategy Moderate is currently generating about 0.0 per unit of volatility. If you would invest  3,140  in Vanguard Lifestrategy Moderate on December 30, 2024 and sell it today you would lose (1.00) from holding Vanguard Lifestrategy Moderate or give up 0.03% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Vanguard Lifestrategy Moderate

Pair Trading with Dow Jones and Vanguard Lifestrategy

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

The idea behind Dow Jones Industrial and Vanguard Lifestrategy Moderate 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.