Correlation Between Financial Services and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Financial Services 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 Financial Services and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Services Fund and Dow Jones Industrial, you can compare the effects of market volatilities on Financial Services 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 Financial Services with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Dow Jones.
Diversification Opportunities for Financial Services and Dow Jones
0.95 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Financial and Dow is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund 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 Financial Services 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 Financial Services Fund 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 Financial Services i.e., Financial Services and Dow Jones go up and down completely randomly.
Pair Corralation between Financial Services and Dow Jones
Assuming the 90 days horizon Financial Services Fund is expected to generate 2.99 times more return on investment than Dow Jones. However, Financial Services is 2.99 times more volatile than Dow Jones Industrial. It trades about 0.04 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.08 per unit of risk. If you would invest 5,227 in Financial Services Fund on September 3, 2024 and sell it today you would earn a total of 2,285 from holding Financial Services Fund or generate 43.72% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Financial Services Fund vs. Dow Jones Industrial
Performance |
| Timeline |
Financial Services and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
Financial Services Fund
Pair trading matchups for Financial Services
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Financial Services and Dow Jones
The main advantage of trading using opposite Financial Services and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Services 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.| Financial Services vs. Absolute Convertible Arbitrage | Financial Services vs. Rationalpier 88 Convertible | Financial Services vs. Calamos Dynamic Convertible | Financial Services vs. Virtus Convertible |
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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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.
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