Correlation Between Dow and Caledonia Mining

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

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

Diversification Opportunities for Dow and Caledonia Mining

0.7

Correlation Coefficient

Dow  Caledonia Mining

Poor diversification

The 3 months correlation between Dow and Caledonia is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Caledonia Mining in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caledonia Mining and Dow 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 Inc are associated (or correlated) with Caledonia Mining. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caledonia Mining has no effect on the direction of Dow i.e., Dow and Caledonia Mining go up and down completely randomly.

Pair Corralation between Dow and Caledonia Mining

Considering the 90-day investment horizon Dow Inc is expected to generate 0.43 times more return on investment than Caledonia Mining. However, Dow Inc is 2.34 times less risky than Caledonia Mining. It trades about -0.24 of its potential returns per unit of risk. Caledonia Mining is currently generating about -0.4 per unit of risk. If you would invest  4,820  in Dow Inc on September 2, 2024 and sell it today you would lose (399.00) from holding Dow Inc or give up 8.28% of portfolio value over 90 days.

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

Dow Inc  vs.  Caledonia Mining

Dow Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dow Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in January 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Caledonia Mining

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Caledonia Mining has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unsteady performance in the last few months, the Stock's fundamental indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with Dow and Caledonia Mining

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

The idea behind Dow Inc and Caledonia Mining 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.