Correlation Between Dow 2x and Index Fund

Can any of the company-specific risk be diversified away by investing in both Dow 2x and Index Fund 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 2x and Index Fund into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Dow 2x Strategy and Index Fund Class, you can compare the effects of market volatilities on Dow 2x and Index Fund 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 2x with a short position of Index Fund. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow 2x and Index Fund.

Diversification Opportunities for Dow 2x and Index Fund

0.84

Correlation Coefficient

Dow 2x  Index Fund

Very poor diversification

The 3 months correlation between Dow and Index is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Dow 2x Strategy and Index Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Index Fund Class and Dow 2x 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 2x Strategy are associated (or correlated) with Index Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Index Fund Class has no effect on the direction of Dow 2x i.e., Dow 2x and Index Fund go up and down completely randomly.

Pair Corralation between Dow 2x and Index Fund

Assuming the 90 days horizon Dow 2x Strategy is expected to under-perform the Index Fund. In addition to that, Dow 2x is 1.71 times more volatile than Index Fund Class. It trades about -0.04 of its total potential returns per unit of risk. Index Fund Class is currently generating about -0.07 per unit of volatility. If you would invest  5,333  in Index Fund Class on December 19, 2024 and sell it today you would lose (228.00) from holding Index Fund Class or give up 4.28% of portfolio value over 90 days.

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

Dow 2x Strategy  vs.  Index Fund Class

Dow 2x Strategy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Dow 2x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Dow 2x is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Index Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Index Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Index Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Dow 2x and Index Fund

The main advantage of trading using opposite Dow 2x and Index Fund positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow 2x position performs unexpectedly, Index Fund 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 Index Fund will offset losses from the drop in Index Fund's long position.

The idea behind Dow 2x Strategy and Index Fund Class 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.