Correlation Between SXP and DIA
Can any of the company-specific risk be diversified away by investing in both SXP 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 SXP and DIA into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SXP and DIA, you can compare the effects of market volatilities on SXP 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 SXP with a short position of DIA. Check out your portfolio center. Please also check ongoing floating volatility patterns of SXP and DIA.
Diversification Opportunities for SXP and DIA
Weak diversification
The 3 months correlation between SXP and DIA is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding SXP and DIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIA and SXP 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 SXP 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 SXP i.e., SXP and DIA go up and down completely randomly.
Pair Corralation between SXP and DIA
Assuming the 90 days trading horizon SXP is expected to generate 1.31 times more return on investment than DIA. However, SXP is 1.31 times more volatile than DIA. It trades about 0.35 of its potential returns per unit of risk. DIA is currently generating about -0.06 per unit of risk. If you would invest 24.00 in SXP on August 31, 2024 and sell it today you would earn a total of 15.00 from holding SXP or generate 62.5% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
SXP vs. DIA
Performance |
| Timeline |
| SXP |
| DIA |
SXP and DIA Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with SXP and DIA
The main advantage of trading using opposite SXP and DIA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SXP 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 SXP 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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