Correlation Between DIA and PST
Can any of the company-specific risk be diversified away by investing in both DIA and PST 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 PST into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DIA and PST, you can compare the effects of market volatilities on DIA and PST 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 PST. Check out your portfolio center. Please also check ongoing floating volatility patterns of DIA and PST.
Diversification Opportunities for DIA and PST
Good diversification
The 3 months correlation between DIA and PST is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding DIA and PST in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PST 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 PST. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PST has no effect on the direction of DIA i.e., DIA and PST go up and down completely randomly.
Pair Corralation between DIA and PST
Assuming the 90 days trading horizon DIA is expected to generate 42.55 times less return on investment than PST. But when comparing it to its historical volatility, DIA is 12.96 times less risky than PST. It trades about 0.07 of its potential returns per unit of risk. PST is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest 0.84 in PST on August 28, 2024 and sell it today you would lose (0.75) from holding PST or give up 88.84% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
DIA vs. PST
Performance |
| Timeline |
| DIA |
| PST |
DIA and PST Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with DIA and PST
The main advantage of trading using opposite DIA and PST positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DIA position performs unexpectedly, PST 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 PST will offset losses from the drop in PST's long position.The idea behind DIA and PST 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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