Correlation Between WisdomTree STOXX and Dow Jones

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

Diversification Opportunities for WisdomTree STOXX and Dow Jones

Pair Corralation between WisdomTree STOXX and Dow Jones

WisdomTree STOXX Europe  vs.  Dow Jones Industrial

Pair Trading with WisdomTree STOXX and Dow Jones

The main advantage of trading using opposite WisdomTree STOXX and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if WisdomTree STOXX 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 WisdomTree STOXX Europe 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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