Correlation Between Dow Jones and Falabella

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

Diversification Opportunities for Dow Jones and Falabella

Pair Corralation between Dow Jones and Falabella

Dow Jones Industrial  vs.  Falabella

Pair Trading with Dow Jones and Falabella

The main advantage of trading using opposite Dow Jones and Falabella positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Falabella 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 Falabella will offset losses from the drop in Falabella's long position.The idea behind Dow Jones Industrial and Falabella 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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