Correlation Between IShares Corp and Dow Jones
Can any of the company-specific risk be diversified away by investing in both IShares Corp 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 IShares Corp and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between iShares Corp Bond and Dow Jones Industrial, you can compare the effects of market volatilities on IShares Corp 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 IShares Corp with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Corp and Dow Jones.
Diversification Opportunities for IShares Corp and Dow Jones
0.89 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between IShares and Dow is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding iShares Corp Bond 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 IShares Corp 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 iShares Corp Bond 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 IShares Corp i.e., IShares Corp and Dow Jones go up and down completely randomly.
Pair Corralation between IShares Corp and Dow Jones
Assuming the 90 days trading horizon IShares Corp is expected to generate 2.87 times less return on investment than Dow Jones. But when comparing it to its historical volatility, iShares Corp Bond is 1.7 times less risky than Dow Jones. It trades about 0.07 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 3,387,678 in Dow Jones Industrial on September 1, 2024 and sell it today you would earn a total of 1,103,387 from holding Dow Jones Industrial or generate 32.57% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 82.26% |
| Values | Daily Returns |
iShares Corp Bond vs. Dow Jones Industrial
Performance |
| Timeline |
IShares Corp and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
iShares Corp Bond
Pair trading matchups for IShares Corp
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against IShares Corp as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. IShares Corp's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, IShares Corp's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to iShares Corp Bond.
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with IShares Corp and Dow Jones
The main advantage of trading using opposite IShares Corp and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Corp 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.The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against IShares Corp as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. IShares Corp's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, IShares Corp's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to iShares Corp Bond.
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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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.
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