Correlation Between Dow Jones and Cocoa
Can any of the company-specific risk be diversified away by investing in both Dow Jones and Cocoa 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 Jones and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dow Jones Industrial and Cocoa, you can compare the effects of market volatilities on Dow Jones and Cocoa 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 Jones with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Cocoa.
Diversification Opportunities for Dow Jones and Cocoa
Modest diversification
The 3 months correlation between Dow and Cocoa is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Dow Jones 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 Jones Industrial are associated (or correlated) with Cocoa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cocoa has no effect on the direction of Dow Jones i.e., Dow Jones and Cocoa go up and down completely randomly.
Pair Corralation between Dow Jones and Cocoa
Assuming the 90 days trading horizon Dow Jones is expected to generate 5.66 times less return on investment than Cocoa. But when comparing it to its historical volatility, Dow Jones Industrial is 3.06 times less risky than Cocoa. It trades about 0.24 of its potential returns per unit of risk. Cocoa is currently generating about 0.45 of returns per unit of risk over similar time horizon. If you would invest 677,000 in Cocoa on August 26, 2024 and sell it today you would earn a total of 219,300 from holding Cocoa or generate 32.39% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Jones Industrial vs. Cocoa
Performance |
| Timeline |
Dow Jones and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Dow Jones Industrial
Pair trading matchups for Dow Jones
Cocoa
Pair trading matchups for Cocoa
Pair Trading with Dow Jones and Cocoa
The main advantage of trading using opposite Dow Jones and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Cocoa 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 Cocoa will offset losses from the drop in Cocoa's long position.| Dow Jones vs. Vistra Energy Corp | Dow Jones vs. Fluence Energy | Dow Jones vs. Old Republic International | Dow Jones vs. Empresa Distribuidora y |
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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.
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