Correlation Between Inverse Russell and Dow Jones

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

By analyzing existing cross correlation between Inverse Russell 2000 and Dow Jones Industrial, you can compare the effects of market volatilities on Inverse Russell 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 Inverse Russell with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Inverse Russell and Dow Jones.

Diversification Opportunities for Inverse Russell and Dow Jones

-0.88

Correlation Coefficient

Inverse Russell  Dow Jones

Pay attention - limited upside

The 3 months correlation between Inverse and Dow is -0.88. Overlapping area represents the amount of risk that can be diversified away by holding Inverse Russell 2000 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 Inverse Russell 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 Inverse Russell 2000 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 Inverse Russell i.e., Inverse Russell and Dow Jones go up and down completely randomly.

Pair Corralation between Inverse Russell and Dow Jones

Assuming the 90 days horizon Inverse Russell 2000 is expected to under-perform the Dow Jones. In addition to that, Inverse Russell is 1.71 times more volatile than Dow Jones Industrial. It trades about -0.09 of its total potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.16 per unit of volatility. If you would invest  10,004  in Dow Jones Industrial on August 30, 2024 and sell it today you would earn a total of  789.00  from holding Dow Jones Industrial or generate 7.89% return on investment over 90 days.

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

Inverse Russell 2000  vs.  Dow Jones Industrial

Inverse Russell 2000

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inverse Russell 2000 has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Dow Jones Industrial

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Dow Jones Industrial are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Dow Jones may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Inverse Russell and Dow Jones

The main advantage of trading using opposite Inverse Russell and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inverse Russell 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 Inverse Russell 2000 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.