Correlation Between Dow Jones and SPDR SP
Can any of the company-specific risk be diversified away by investing in both Dow Jones and SPDR SP 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 SPDR SP 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 SPDR SP 600, you can compare the effects of market volatilities on Dow Jones and SPDR SP 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 SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and SPDR SP.
Diversification Opportunities for Dow Jones and SPDR SP
Very poor diversification
The 3 months correlation between Dow and SPDR is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and SPDR SP 600 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR 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 SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP 600 has no effect on the direction of Dow Jones i.e., Dow Jones and SPDR SP go up and down completely randomly.
Pair Corralation between Dow Jones and SPDR SP
Assuming the 90 days trading horizon Dow Jones is expected to generate 1.87 times less return on investment than SPDR SP. But when comparing it to its historical volatility, Dow Jones Industrial is 1.68 times less risky than SPDR SP. It trades about 0.21 of its potential returns per unit of risk. SPDR SP 600 is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest 9,124 in SPDR SP 600 on August 25, 2024 and sell it today you would earn a total of 778.00 from holding SPDR SP 600 or generate 8.53% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Jones Industrial vs. SPDR SP 600
Performance |
| Timeline |
Dow Jones and SPDR SP Volatility Contrast
Predicted Return Density |
| Returns |
Dow Jones Industrial
Pair trading matchups for Dow Jones
SPDR SP 600
Pair trading matchups for SPDR SP
Pair Trading with Dow Jones and SPDR SP
The main advantage of trading using opposite Dow Jones and SPDR SP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, SPDR SP 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 SPDR SP will offset losses from the drop in SPDR SP's long position.| Dow Jones vs. Sphere Entertainment Co | Dow Jones vs. Perseus Mining Limited | Dow Jones vs. Titan Machinery | Dow Jones vs. Simon Property Group |
| SPDR SP vs. Invesco DWA Momentum | SPDR SP vs. Invesco DWA Developed | SPDR SP vs. Invesco DWA Emerging | SPDR SP vs. First Trust Small |
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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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