Correlation Between DIA and NAS
Can any of the company-specific risk be diversified away by investing in both DIA and NAS 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 DIA and NAS into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DIA and NAS, you can compare the effects of market volatilities on DIA and NAS 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 DIA with a short position of NAS. Check out your portfolio center. Please also check ongoing floating volatility patterns of DIA and NAS.
Diversification Opportunities for DIA and NAS
Excellent diversification
The 3 months correlation between DIA and NAS is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding DIA and NAS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NAS and DIA 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 DIA are associated (or correlated) with NAS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NAS has no effect on the direction of DIA i.e., DIA and NAS go up and down completely randomly.
Pair Corralation between DIA and NAS
Assuming the 90 days trading horizon DIA is expected to generate 1.48 times more return on investment than NAS. However, DIA is 1.48 times more volatile than NAS. It trades about 0.1 of its potential returns per unit of risk. NAS is currently generating about -0.01 per unit of risk. If you would invest 25.00 in DIA on August 31, 2024 and sell it today you would earn a total of 59.00 from holding DIA or generate 236.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
DIA vs. NAS
Performance |
| Timeline |
| DIA |
| NAS |
DIA and NAS Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with DIA and NAS
The main advantage of trading using opposite DIA and NAS positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DIA position performs unexpectedly, NAS 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 NAS will offset losses from the drop in NAS's long position.The idea behind DIA and NAS 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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