Correlation Between ProShares UltraShort and DOW JONES

Specify exactly 2 symbols:
Can any of the company-specific risk be diversified away by investing in both ProShares UltraShort 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 ProShares UltraShort and DOW JONES into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between ProShares UltraShort Basic and DOW JONES INDUSTRIAL, you can compare the effects of market volatilities on ProShares UltraShort 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 ProShares UltraShort with a short position of DOW JONES. Check out your portfolio center. Please also check ongoing floating volatility patterns of ProShares UltraShort and DOW JONES.

Diversification Opportunities for ProShares UltraShort and DOW JONES

-0.87
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between ProShares and DOW JONES is -0.87. Overlapping area represents the amount of risk that can be diversified away by holding ProShares UltraShort Basic 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 ProShares UltraShort 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 ProShares UltraShort Basic 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 ProShares UltraShort i.e., ProShares UltraShort and DOW JONES go up and down completely randomly.
    Optimize

Pair Corralation between ProShares UltraShort and DOW JONES

Considering the 90-day investment horizon ProShares UltraShort Basic is expected to under-perform the DOW JONES. In addition to that, ProShares UltraShort is 2.85 times more volatile than DOW JONES INDUSTRIAL. It trades about -0.21 of its total potential returns per unit of risk. DOW JONES INDUSTRIAL is currently generating about 0.24 per unit of volatility. If you would invest  3,282,700  in DOW JONES INDUSTRIAL on September 7, 2022 and sell it today you would earn a total of  176,277  from holding DOW JONES INDUSTRIAL or generate 5.37% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthSignificant
Accuracy90.0%
ValuesDaily Returns

ProShares UltraShort Basic  vs.  DOW JONES INDUSTRIAL

 Performance (%) 
       Timeline  

ProShares UltraShort and DOW JONES Volatility Contrast

   Predicted Return Density   
       Returns  

ProShares UltraShort Basic

Pair trading matchups for ProShares UltraShort

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 ProShares UltraShort 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. ProShares UltraShort'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, ProShares UltraShort'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 ProShares UltraShort Basic.

DOW JONES INDUSTRIAL

Pair trading matchups for DOW JONES

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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.

Pair Trading with ProShares UltraShort and DOW JONES

The main advantage of trading using opposite ProShares UltraShort and DOW JONES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ProShares UltraShort 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'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 ProShares UltraShort 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. ProShares UltraShort'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, ProShares UltraShort'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 ProShares UltraShort Basic.
The idea behind ProShares UltraShort Basic and DOW JONES INDUSTRIAL 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.
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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.

Other Complementary Tools

Portfolio Holdings
Check your current holdings and cash postion to detemine if your portfolio needs rebalancing
Go
Instant Ratings
Determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance
Go
Equity Analysis
Research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities
Go
Portfolio Optimization
Compute new portfolio that will generate highest expected return given your specified tolerance for risk
Go
Content Syndication
Quickly integrate customizable finance content to your own investment portal
Go
Price Ceiling Movement
Calculate and plot Price Ceiling Movement for different equity instruments
Go
Portfolio Center
All portfolio management and optimization tools to improve performance of your portfolios
Go
Global Correlations
Find global opportunities by holding instruments from different markets
Go
My Watchlist Analysis
Analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like
Go
Portfolio Diagnostics
Use generated alerts and portfolio events aggregator to diagnose current holdings
Go
Idea Analyzer
Analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas
Go