Correlation Between DOW and American Century

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Can any of the company-specific risk be diversified away by investing in both DOW and American Century 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 DOW and American Century into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and American Century Real, you can compare the effects of market volatilities on DOW and American Century 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 DOW with a short position of American Century. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and American Century.

Diversification Opportunities for DOW and American Century

0.94
  Correlation Coefficient

Almost no diversification

The 3 months correlation between DOW and American is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding DOW and American Century Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Century Real and DOW 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 DOW are associated (or correlated) with American Century. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Century Real has no effect on the direction of DOW i.e., DOW and American Century go up and down completely randomly.
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Pair Corralation between DOW and American Century

Given the investment horizon of 90 days DOW is expected to generate 0.69 times more return on investment than American Century. However, DOW is 1.44 times less risky than American Century. It trades about -0.37 of its potential returns per unit of risk. American Century Real is currently generating about -0.35 per unit of risk. If you would invest  3,209,899  in DOW on June 30, 2022 and sell it today you would lose (296,400)  from holding DOW or give up 9.23% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy95.45%
ValuesDaily Returns

DOW  vs.  American Century Real

 Performance (%) 
       Timeline  

DOW and American Century Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

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 DOW 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. DOW'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, DOW'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 DOW.

American Century Real

Pair trading matchups for American Century

Pair Trading with DOW and American Century

The main advantage of trading using opposite DOW and American Century positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, American Century 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 American Century will offset losses from the drop in American Century's 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 DOW 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. DOW'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, DOW'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 DOW.
The idea behind DOW and American Century Real 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.
American Century vs. Dupont Denemours
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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.

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