Correlation Between Select Sector and Dow Jones
Can any of the company-specific risk be diversified away by investing in both Select Sector 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 Select Sector and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between The Select Sector and Dow Jones Industrial, you can compare the effects of market volatilities on Select Sector 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 Select Sector with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Select Sector and Dow Jones.
Diversification Opportunities for Select Sector and Dow Jones
0.86 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Select and Dow is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector 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 Select Sector 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 The Select Sector 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 Select Sector i.e., Select Sector and Dow Jones go up and down completely randomly.
Pair Corralation between Select Sector and Dow Jones
Assuming the 90 days trading horizon The Select Sector is expected to generate 1.91 times more return on investment than Dow Jones. However, Select Sector is 1.91 times more volatile than Dow Jones Industrial. It trades about 0.3 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.37 per unit of risk. If you would invest 93,090 in The Select Sector on September 4, 2024 and sell it today you would earn a total of 10,810 from holding The Select Sector or generate 11.61% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.24% |
| Values | Daily Returns |
The Select Sector vs. Dow Jones Industrial
Performance |
| Timeline |
Select Sector and Dow Jones Volatility Contrast
Predicted Return Density |
| Returns |
The Select Sector
Pair trading matchups for Select Sector
Dow Jones Industrial
Pair trading matchups for Dow Jones
Pair Trading with Select Sector and Dow Jones
The main advantage of trading using opposite Select Sector and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Select Sector 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.| Select Sector vs. The Select Sector | Select Sector vs. The Select Sector | Select Sector vs. The Select Sector | Select Sector vs. The Select Sector |
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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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