Correlation Between IShares Regional and SPDR Dow

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

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

Diversification Opportunities for IShares Regional and SPDR Dow

0.85

Correlation Coefficient

IShares Regional  SPDR Dow

Very poor diversification

The 3 months correlation between IShares and SPDR is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding iShares Regional Banks and SPDR Dow Jones in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Dow Jones and IShares Regional 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 iShares Regional Banks are associated (or correlated) with SPDR Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Dow Jones has no effect on the direction of IShares Regional i.e., IShares Regional and SPDR Dow go up and down completely randomly.

Pair Corralation between IShares Regional and SPDR Dow

Assuming the 90 days trading horizon iShares Regional Banks is expected to generate 1.66 times more return on investment than SPDR Dow. However, IShares Regional is 1.66 times more volatile than SPDR Dow Jones. It trades about 0.13 of its potential returns per unit of risk. SPDR Dow Jones is currently generating about 0.15 per unit of risk. If you would invest  64,041  in iShares Regional Banks on October 3, 2024 and sell it today you would earn a total of  44,051  from holding iShares Regional Banks or generate 68.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	92.45%
Values	Daily Returns

iShares Regional Banks  vs.  SPDR Dow Jones

iShares Regional Banks

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Regional Banks are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, IShares Regional showed solid returns over the last few months and may actually be approaching a breakup point.

SPDR Dow Jones

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR Dow Jones are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR Dow may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with IShares Regional and SPDR Dow

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

The idea behind iShares Regional Banks and SPDR Dow Jones 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.