Correlation Between Dow Jones and Smallcap
Can any of the company-specific risk be diversified away by investing in both Dow Jones and Smallcap 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 Smallcap 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 Smallcap Sp 600, you can compare the effects of market volatilities on Dow Jones and Smallcap 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 Smallcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Smallcap.
Diversification Opportunities for Dow Jones and Smallcap
Poor diversification
The 3 months correlation between Dow and Smallcap is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Smallcap Sp 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Sp 600 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 Smallcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Sp 600 has no effect on the direction of Dow Jones i.e., Dow Jones and Smallcap go up and down completely randomly.
Pair Corralation between Dow Jones and Smallcap
Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 0.54 times more return on investment than Smallcap. However, Dow Jones Industrial is 1.84 times less risky than Smallcap. It trades about 0.08 of its potential returns per unit of risk. Smallcap Sp 600 is currently generating about 0.03 per unit of risk. If you would invest 3,396,635 in Dow Jones Industrial on September 4, 2024 and sell it today you would earn a total of 1,081,565 from holding Dow Jones Industrial or generate 31.84% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 99.19% |
| Values | Daily Returns |
Dow Jones Industrial vs. Smallcap Sp 600
Performance |
| Timeline |
Dow Jones and Smallcap Volatility Contrast
Predicted Return Density |
| Returns |
Dow Jones Industrial
Pair trading matchups for Dow Jones
Smallcap Sp 600
Pair trading matchups for Smallcap
Pair Trading with Dow Jones and Smallcap
The main advantage of trading using opposite Dow Jones and Smallcap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Smallcap 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 Smallcap will offset losses from the drop in Smallcap's long position.| Dow Jones vs. Gentex | Dow Jones vs. American Axle Manufacturing | Dow Jones vs. Pearson PLC ADR | Dow Jones vs. Marine Products |
| Smallcap vs. Strategic Asset Management | Smallcap vs. Strategic Asset Management | Smallcap vs. Strategic Asset Management | Smallcap vs. Strategic Asset Management |
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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.
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