Correlation Between Frost Kempner and Dow Jones

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

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

Diversification Opportunities for Frost Kempner and Dow Jones

-0.01

Correlation Coefficient

Frost Kempner  Dow Jones

Good diversification

The 3 months correlation between Frost and Dow is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Frost Kempner Treasury and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial and Frost Kempner 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 Frost Kempner Treasury are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of Frost Kempner i.e., Frost Kempner and Dow Jones go up and down completely randomly.

Pair Corralation between Frost Kempner and Dow Jones

Assuming the 90 days horizon Frost Kempner is expected to generate 44.16 times less return on investment than Dow Jones. But when comparing it to its historical volatility, Frost Kempner Treasury is 6.58 times less risky than Dow Jones. It trades about 0.02 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  4,160,618  in Dow Jones Industrial on September 17, 2024 and sell it today you would earn a total of  222,188  from holding Dow Jones Industrial or generate 5.34% return on investment over 90 days.

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

Frost Kempner Treasury  vs.  Dow Jones Industrial

Pair Trading with Frost Kempner and Dow Jones

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

The idea behind Frost Kempner Treasury and Dow Jones Industrial 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.