Correlation Between Ford and Dow
Can any of the company-specific risk be diversified away by investing in both Ford and Dow 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 Ford and Dow into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and Dow Inc, you can compare the effects of market volatilities on Ford and Dow 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 Ford with a short position of Dow. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Dow.
Diversification Opportunities for Ford and Dow
Average diversification
The 3 months correlation between Ford and Dow is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Dow Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Inc and Ford 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 Ford Motor are associated (or correlated) with Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Inc has no effect on the direction of Ford i.e., Ford and Dow go up and down completely randomly.
Pair Corralation between Ford and Dow
Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the Dow. But the stock apears to be less risky and, when comparing its historical volatility, Ford Motor is 1.25 times less risky than Dow. The stock trades about -0.5 of its potential returns per unit of risk. The Dow Inc is currently generating about -0.37 of returns per unit of risk over similar time horizon. If you would invest 4,304 in Dow Inc on September 24, 2024 and sell it today you would lose (562.00) from holding Dow Inc or give up 13.06% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Insignificant |
Accuracy | 95.24% |
Values | Daily Returns |
Ford Motor vs. Dow Inc
Performance |
Timeline |
Ford Motor |
Dow Inc |
Ford and Dow Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Ford and Dow
The main advantage of trading using opposite Ford and Dow positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford position performs unexpectedly, Dow 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 Dow will offset losses from the drop in Dow's long position.The idea behind Ford Motor and Dow Inc 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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