Correlation Between Guggenheim Alpha and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Guggenheim Alpha 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 Guggenheim Alpha and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Guggenheim Alpha Opportunity and Dow Jones Industrial, you can compare the effects of market volatilities on Guggenheim Alpha 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 Guggenheim Alpha with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Guggenheim Alpha and Dow Jones.
Diversification Opportunities for Guggenheim Alpha and Dow Jones
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Guggenheim and Dow is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Guggenheim Alpha Opportunity 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 Guggenheim Alpha 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 Guggenheim Alpha Opportunity 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 Guggenheim Alpha i.e., Guggenheim Alpha and Dow Jones go up and down completely randomly.
Pair Corralation between Guggenheim Alpha and Dow Jones
Assuming the 90 days horizon Guggenheim Alpha is expected to generate 2.82 times less return on investment than Dow Jones. But when comparing it to its historical volatility, Guggenheim Alpha Opportunity is 1.22 times less risky than Dow Jones. It trades about 0.06 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest 3,885,286 in Dow Jones Industrial on August 26, 2024 and sell it today you would earn a total of 544,365 from holding Dow Jones Industrial or generate 14.01% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Guggenheim Alpha Opportunity vs. Dow Jones Industrial
Performance |
| Timeline |
Guggenheim Alpha and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
Guggenheim Alpha Opportunity
Pair trading matchups for Guggenheim Alpha
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 Guggenheim Alpha 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. Guggenheim Alpha'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, Guggenheim Alpha'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 Guggenheim Alpha Opportunity.
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Guggenheim Alpha and Dow Jones
The main advantage of trading using opposite Guggenheim Alpha and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Guggenheim Alpha 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 Guggenheim Alpha 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. Guggenheim Alpha'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, Guggenheim Alpha'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 Guggenheim Alpha Opportunity.
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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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.
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