Correlation Between Dfa World and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Dfa World and Dow Jones 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 Dfa World and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dfa World Ex and Dow Jones Industrial, you can compare the effects of market volatilities on Dfa World and Dow Jones 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 Dfa World with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dfa World and Dow Jones.
Diversification Opportunities for Dfa World and Dow Jones
Average diversification
The 3 months correlation between Dfa and Dow is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Dfa World Ex and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial and Dfa World 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 Dfa World Ex are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of Dfa World i.e., Dfa World and Dow Jones go up and down completely randomly.
Pair Corralation between Dfa World and Dow Jones
Assuming the 90 days horizon Dfa World is expected to generate 2.49 times less return on investment than Dow Jones. But when comparing it to its historical volatility, Dfa World Ex is 1.21 times less risky than Dow Jones. It trades about 0.05 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 4,284,026 in Dow Jones Industrial on October 21, 2024 and sell it today you would earn a total of 64,757 from holding Dow Jones Industrial or generate 1.51% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 95.0% |
| Values | Daily Returns |
Dfa World Ex vs. Dow Jones Industrial
Performance |
| Timeline |
Dfa World and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
Dfa World Ex
Pair trading matchups for Dfa World
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Dfa World and Dow Jones
The main advantage of trading using opposite Dfa World and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dfa World position performs unexpectedly, Dow Jones 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 Dow Jones will offset losses from the drop in Dow Jones' long position.| Dfa World vs. Intal High Relative | Dfa World vs. Dfa International | Dfa World vs. Dfa Inflation Protected | Dfa World vs. Dfa International Small |
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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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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