Correlation Between LUN and DIA
Can any of the company-specific risk be diversified away by investing in both LUN and DIA 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 LUN and DIA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LUN and DIA, you can compare the effects of market volatilities on LUN and DIA 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 LUN with a short position of DIA. Check out your portfolio center. Please also check ongoing floating volatility patterns of LUN and DIA.
Diversification Opportunities for LUN and DIA
Very poor diversification
The 3 months correlation between LUN and DIA is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding LUN and DIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIA and LUN 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 LUN are associated (or correlated) with DIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DIA has no effect on the direction of LUN i.e., LUN and DIA go up and down completely randomly.
Pair Corralation between LUN and DIA
Assuming the 90 days trading horizon LUN is expected to generate 3.55 times more return on investment than DIA. However, LUN is 3.55 times more volatile than DIA. It trades about 0.09 of its potential returns per unit of risk. DIA is currently generating about 0.04 per unit of risk. If you would invest 2.34 in LUN on January 10, 2025 and sell it today you would lose (0.67) from holding LUN or give up 28.63% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
LUN vs. DIA
Performance |
| Timeline |
| LUN |
| DIA |
LUN and DIA Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with LUN and DIA
The main advantage of trading using opposite LUN and DIA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LUN position performs unexpectedly, DIA 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 DIA will offset losses from the drop in DIA's long position.The idea behind LUN and DIA pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.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 Anywhere module to track or share privately all of your investments from the convenience of any device.
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