Correlation Between Large Capitalization and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Large Capitalization 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 Large Capitalization and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Large Capitalization Growth and Dow Jones Industrial, you can compare the effects of market volatilities on Large Capitalization 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 Large Capitalization with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Capitalization and Dow Jones.
Diversification Opportunities for Large Capitalization and Dow Jones
0.93 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Large and Dow is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Large Capitalization Growth 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 Large Capitalization 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 Large Capitalization Growth 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 Large Capitalization i.e., Large Capitalization and Dow Jones go up and down completely randomly.
Pair Corralation between Large Capitalization and Dow Jones
Assuming the 90 days horizon Large Capitalization is expected to generate 1.16 times less return on investment than Dow Jones. In addition to that, Large Capitalization is 2.2 times more volatile than Dow Jones Industrial. It trades about 0.05 of its total potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.13 per unit of volatility. If you would invest 3,543,042 in Dow Jones Industrial on August 25, 2024 and sell it today you would earn a total of 886,609 from holding Dow Jones Industrial or generate 25.02% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Large Capitalization Growth vs. Dow Jones Industrial
Performance |
| Timeline |
Large Capitalization and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
Large Capitalization Growth
Pair trading matchups for Large Capitalization
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Large Capitalization and Dow Jones
The main advantage of trading using opposite Large Capitalization and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Capitalization 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 idea behind Large Capitalization Growth and Dow Jones Industrial 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.
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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 Transaction History module to view history of all your transactions and understand their impact on performance.
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