Correlation Between Dow Jones and First American

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

Diversification Opportunities for Dow Jones and First American

0.86

Correlation Coefficient

Dow Jones  First American

Very poor diversification

The 3 months correlation between Dow and First is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and First American Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First American Financial 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 First American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First American Financial has no effect on the direction of Dow Jones i.e., Dow Jones and First American go up and down completely randomly.

Pair Corralation between Dow Jones and First American

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.15 times less return on investment than First American. But when comparing it to its historical volatility, Dow Jones Industrial is 2.08 times less risky than First American. It trades about 0.15 of its potential returns per unit of risk. First American Financial is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  4,499  in First American Financial on September 17, 2024 and sell it today you would earn a total of  1,651  from holding First American Financial or generate 36.7% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.31%
Values	Daily Returns

Dow Jones Industrial  vs.  First American Financial

Pair Trading with Dow Jones and First American

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

The idea behind Dow Jones Industrial and First American Financial 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.