Correlation Between Dow Jones and Lemonade
Can any of the company-specific risk be diversified away by investing in both Dow Jones and Lemonade 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 Lemonade 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 Lemonade, you can compare the effects of market volatilities on Dow Jones and Lemonade 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 Lemonade. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Lemonade.
Diversification Opportunities for Dow Jones and Lemonade
Poor diversification
The 3 months correlation between Dow and Lemonade is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Lemonade in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lemonade 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 Lemonade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lemonade has no effect on the direction of Dow Jones i.e., Dow Jones and Lemonade go up and down completely randomly.
Pair Corralation between Dow Jones and Lemonade
Assuming the 90 days trading horizon Dow Jones is expected to generate 8.49 times less return on investment than Lemonade. But when comparing it to its historical volatility, Dow Jones Industrial is 6.92 times less risky than Lemonade. It trades about 0.15 of its potential returns per unit of risk. Lemonade is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest 1,651 in Lemonade on August 29, 2024 and sell it today you would earn a total of 3,265 from holding Lemonade or generate 197.76% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Jones Industrial vs. Lemonade
Performance |
| Timeline |
Dow Jones and Lemonade Volatility Contrast
Predicted Return Density |
| Returns |
Dow Jones Industrial
Pair trading matchups for Dow Jones
Lemonade
Pair trading matchups for Lemonade
Pair Trading with Dow Jones and Lemonade
The main advantage of trading using opposite Dow Jones and Lemonade positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Lemonade 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 Lemonade will offset losses from the drop in Lemonade's long position.| Dow Jones vs. Kaltura | Dow Jones vs. Artisan Partners Asset | Dow Jones vs. US Global Investors | Dow Jones vs. Analog Devices |
| Lemonade vs. Argo Group International | Lemonade vs. Donegal Group A | Lemonade vs. Selective Insurance Group |
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 Global Correlations module to find global opportunities by holding instruments from different markets.
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