# Correlation Between Ab Municipal and DOW

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

## Diversification Opportunities for Ab Municipal and DOW

0.69 | Correlation Coefficient |

### Poor diversification

The 3 months correlation between AVAAX and DOW is

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

Assuming the 90 days horizon Ab Municipal Income is expected to generate 0.16 times more return on investment than DOW. However, Ab Municipal Income is 6.22 times less risky than DOW. It trades about -0.78 of its potential returns per unit of risk. DOW is currently generating about -0.33 per unit of risk. If you would invest

**1,039**in Ab Municipal Income on**June 28, 2022**and sell it today you would**lose (31.00)**from holding Ab Municipal Income or give up**2.98%**of portfolio value over**90**days.Time Period | 3 Months [change] |

Direction | Moves Together |

Strength | Significant |

Accuracy | 100.0% |

Values | Daily Returns |

## Ab Municipal Income vs. DOW

Performance (%) |

Timeline |

## Ab Municipal and DOW Volatility Contrast

Predicted Return Density |

Returns |

## Ab Municipal Income

### Pair trading matchups for Ab Municipal

## DOW

### Pair trading matchups for DOW

RESMED CDI vs. DOW | ||

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BRAMB vs. DOW | ||

BAPCOR vs. DOW | ||

Microsoft Corp vs. DOW | ||

Wisetech Global vs. DOW | ||

Westpac Banking vs. DOW | ||

Aurizon Holdings vs. DOW | ||

ANSELL FPO vs. 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.

## Pair Trading with Ab Municipal and DOW

The main advantage of trading using opposite Ab Municipal and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ab Municipal position performs unexpectedly, DOW 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 will offset losses from the drop in DOW's long position.Ab Municipal vs. McDonalds Corp |

Wisetech Global vs. DOW | ||

AMCOR PLC vs. DOW | ||

Aurizon Holdings vs. DOW | ||

RESMED CDI vs. DOW | ||

Westpac Banking vs. DOW | ||

ANSELL FPO vs. DOW | ||

BAPCOR vs. DOW | ||

BRAMB vs. DOW | ||

Sentinelone Inc vs. 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.

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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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