Correlation Between International Business and DOW

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

Diversification Opportunities for International Business and DOW

-0.16
  Correlation Coefficient

Good diversification

The 3 months correlation between International and DOW is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and International Business 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 International Business Machines 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 International Business i.e., International Business and DOW go up and down completely randomly.
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Pair Corralation between International Business and DOW

Considering the 90-day investment horizon International Business Machines is expected to under-perform the DOW. In addition to that, International Business is 1.63 times more volatile than DOW. It trades about -0.09 of its total potential returns per unit of risk. DOW is currently generating about 0.39 per unit of volatility. If you would invest  3,128,826  in DOW on May 16, 2022 and sell it today you would earn a total of  247,279  from holding DOW or generate 7.9% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

International Business Machine  vs.  DOW

 Performance (%) 
       Timeline  

International Business and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Rolls Royce vs. DOW
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Universal Health vs. DOW
Essential Properties vs. DOW
Nike vs. DOW
Semiconductor Bear vs. DOW
Cto Realty 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 International Business and DOW

The main advantage of trading using opposite International Business and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Business 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.
The idea behind International Business Machines and DOW 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.

DOW

Pair trading matchups for DOW

Nike vs. DOW
Cto Realty vs. DOW
Semiconductor Bear vs. DOW
Ark Innovation vs. DOW
Essential Properties vs. DOW
Prog Hldgs vs. DOW
Universal Health vs. DOW
Horizon Therapeutics 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 Watchlist Optimization module to optimize watchlists to build efficient portfolio or rebalance existing positions based on mean-variance optimization algorithm.

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