Correlation Between E I and Dow
Can any of the company-specific risk be diversified away by investing in both E I and 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 E I and Dow into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between E I du and Dow Inc, you can compare the effects of market volatilities on E I and 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 E I with a short position of Dow. Check out your portfolio center. Please also check ongoing floating volatility patterns of E I and Dow.
Diversification Opportunities for E I and Dow
Poor diversification
The 3 months correlation between CTA-PB and Dow is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding E I du and Dow Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Inc and E I 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 E I du are associated (or correlated) with Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Inc has no effect on the direction of E I i.e., E I and Dow go up and down completely randomly.
Pair Corralation between E I and Dow
Assuming the 90 days trading horizon E I du is expected to generate 0.72 times more return on investment than Dow. However, E I du is 1.39 times less risky than Dow. It trades about 0.04 of its potential returns per unit of risk. Dow Inc is currently generating about -0.11 per unit of risk. If you would invest 6,984 in E I du on September 1, 2024 and sell it today you would earn a total of 313.00 from holding E I du or generate 4.48% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
E I du vs. Dow Inc
Performance |
| Timeline |
| E I du |
| Dow Inc |
E I and Dow Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with E I and Dow
The main advantage of trading using opposite E I and Dow positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if E I position performs unexpectedly, 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 Dow will offset losses from the drop in Dow's long position.The idea behind E I du and Dow Inc 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
Other Complementary Tools
| ETF Categories List of ETF categories grouped based on various criteria, such as the investment strategy or type of investments | |
| Portfolio Optimization Compute new portfolio that will generate highest expected return given your specified tolerance for risk | |
| Portfolio Comparator Compare the composition, asset allocations and performance of any two portfolios in your account | |
| Global Markets Map Get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes | |
| Portfolio Center All portfolio management and optimization tools to improve performance of your portfolios |