Correlation Between Dow Jones and Overlay Shares
Can any of the company-specific risk be diversified away by investing in both Dow Jones and Overlay Shares 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 Overlay Shares 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 Overlay Shares Hedged, you can compare the effects of market volatilities on Dow Jones and Overlay Shares 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 Overlay Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Overlay Shares.
Diversification Opportunities for Dow Jones and Overlay Shares
0.96 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Dow and Overlay is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Overlay Shares Hedged in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Overlay Shares Hedged 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 Overlay Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Overlay Shares Hedged has no effect on the direction of Dow Jones i.e., Dow Jones and Overlay Shares go up and down completely randomly.
Pair Corralation between Dow Jones and Overlay Shares
Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 1.65 times more return on investment than Overlay Shares. However, Dow Jones is 1.65 times more volatile than Overlay Shares Hedged. It trades about 0.16 of its potential returns per unit of risk. Overlay Shares Hedged is currently generating about 0.13 per unit of risk. If you would invest 4,233,015 in Dow Jones Industrial on August 30, 2024 and sell it today you would earn a total of 239,191 from holding Dow Jones Industrial or generate 5.65% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Jones Industrial vs. Overlay Shares Hedged
Performance |
| Timeline |
Dow Jones and Overlay Shares Volatility Contrast
Predicted Return Density |
| Returns |
Dow Jones Industrial
Pair trading matchups for Dow Jones
Overlay Shares Hedged
Pair trading matchups for Overlay Shares
Pair Trading with Dow Jones and Overlay Shares
The main advantage of trading using opposite Dow Jones and Overlay Shares positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Overlay Shares 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 Overlay Shares will offset losses from the drop in Overlay Shares' long position.| Dow Jones vs. Skillful Craftsman Education | Dow Jones vs. Acco Brands | Dow Jones vs. Cracker Barrel Old | Dow Jones vs. Coursera |
| Overlay Shares vs. Listed Funds Trust | Overlay Shares vs. Overlay Shares Core | Overlay Shares vs. Overlay Shares Large | Overlay Shares vs. Overlay Shares Municipal |
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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.
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