Correlation Between Dorman Products and NASDAQ Biotechnology

Can any of the company-specific risk be diversified away by investing in both Dorman Products and NASDAQ Biotechnology 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 Dorman Products and NASDAQ Biotechnology into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Dorman Products and NASDAQ Biotechnology, you can compare the effects of market volatilities on Dorman Products and NASDAQ Biotechnology 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 Dorman Products with a short position of NASDAQ Biotechnology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dorman Products and NASDAQ Biotechnology.

Diversification Opportunities for Dorman Products and NASDAQ Biotechnology

-0.5

Correlation Coefficient

Dorman Products  NASDAQ Biotechnology

Very good diversification

The 3 months correlation between Dorman and NASDAQ is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Dorman Products and NASDAQ Biotechnology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NASDAQ Biotechnology and Dorman Products 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 Dorman Products are associated (or correlated) with NASDAQ Biotechnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NASDAQ Biotechnology has no effect on the direction of Dorman Products i.e., Dorman Products and NASDAQ Biotechnology go up and down completely randomly.

Pair Corralation between Dorman Products and NASDAQ Biotechnology

Given the investment horizon of 90 days Dorman Products is expected to generate 1.84 times more return on investment than NASDAQ Biotechnology. However, Dorman Products is 1.84 times more volatile than NASDAQ Biotechnology. It trades about 0.13 of its potential returns per unit of risk. NASDAQ Biotechnology is currently generating about -0.12 per unit of risk. If you would invest  11,639  in Dorman Products on September 14, 2024 and sell it today you would earn a total of  2,077  from holding Dorman Products or generate 17.85% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Dorman Products  vs.  NASDAQ Biotechnology

Pair Trading with Dorman Products and NASDAQ Biotechnology

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

The idea behind Dorman Products and NASDAQ Biotechnology 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.

Check out your portfolio center.

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.