Correlation Between SPDR SP and DOW JONES

Specify exactly 2 symbols:
Can any of the company-specific risk be diversified away by investing in both SPDR SP 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 SPDR SP and DOW JONES into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SPDR SP 500 and DOW JONES INDUSTRIAL, you can compare the effects of market volatilities on SPDR SP 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 SPDR SP with a short position of DOW JONES. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and DOW JONES.

Diversification Opportunities for SPDR SP and DOW JONES

0.81
  Correlation Coefficient

Very poor diversification

The 3 months correlation between SPDR SP and DOW JONES is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 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 SPDR SP 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 SPDR SP 500 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 SPDR SP i.e., SPDR SP and DOW JONES go up and down completely randomly.
    Optimize

Pair Corralation between SPDR SP and DOW JONES

Considering the 90-day investment horizon SPDR SP is expected to generate 1.46 times less return on investment than DOW JONES. In addition to that, SPDR SP is 1.28 times more volatile than DOW JONES INDUSTRIAL. It trades about 0.16 of its total potential returns per unit of risk. DOW JONES INDUSTRIAL is currently generating about 0.29 per unit of volatility. If you would invest  2,949,089  in DOW JONES INDUSTRIAL on September 2, 2022 and sell it today you would earn a total of  509,888  from holding DOW JONES INDUSTRIAL or generate 17.29% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

SPDR SP 500  vs.  DOW JONES INDUSTRIAL

 Performance (%) 
       Timeline  

SPDR SP and DOW JONES Volatility Contrast

   Predicted Return Density   
       Returns  

SPDR SP 500

Pair trading matchups for SPDR SP

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 SPDR SP and DOW JONES

The main advantage of trading using opposite SPDR SP and DOW JONES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SPDR SP 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.
SPDR SP vs. Vanguard Large-Cap Index
SPDR SP vs. Cisco Systems
The idea behind SPDR SP 500 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.

Other Complementary Tools

Correlation Analysis
Reduce portfolio risk simply by holding instruments which are not perfectly correlated
Go
Portfolio Comparator
Compare the composition, asset allocations and performance of any two portfolios in your account
Go
Idea Breakdown
Analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes
Go
Share Portfolio
Track or share privately all of your investments from the convenience of any device
Go
Equity Analysis
Research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities
Go
Piotroski F Score
Get Piotroski F Score based on binary analysis strategy of nine different fundamentals
Go
Global Markets Map
Get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes
Go
Idea Analyzer
Analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas
Go
Analyst Recommendations
Analyst recommendations and target price estimates broken down by several categories
Go
Bond Analysis
Evaluate and analyze corporate bonds as a potential investment for your portfolios.
Go
Competition Analyzer
Analyze and compare many basic indicators for a group of related or unrelated entities
Go
Money Managers
Screen money managers from public funds and ETFs managed around the world
Go
Price Ceiling Movement
Calculate and plot Price Ceiling Movement for different equity instruments
Go