Correlation Between DOW and Nasdaq

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

Diversification Opportunities for DOW and Nasdaq

0.93
  Correlation Coefficient

Almost no diversification

The 3 months correlation between DOW and Nasdaq is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Nasdaq in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq 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 Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq has no effect on the direction of DOW i.e., DOW and Nasdaq go up and down completely randomly.
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Pair Corralation between DOW and Nasdaq

Given the investment horizon of 90 days DOW is expected to generate 0.62 times more return on investment than Nasdaq. However, DOW is 1.61 times less risky than Nasdaq. It trades about -0.11 of its potential returns per unit of risk. Nasdaq is currently generating about -0.12 per unit of risk. If you would invest  3,306,150  in DOW on April 1, 2022 and sell it today you would lose (243,037)  from holding DOW or give up 7.35% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Nasdaq

 Performance (%) 
      Timeline 

DOW and Nasdaq Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Vmware vs. DOW
Citigroup vs. DOW
Salesforce vs. DOW
Pennantpark Investme vs. DOW
GM vs. DOW
Twitter vs. DOW
Pacific Gas vs. DOW
Otp Bank vs. DOW
Cleveland Cliffs vs. DOW
Dupont Denemours vs. DOW
Ford 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.

Nasdaq

Pair trading matchups for Nasdaq

Pennantpark Investme vs. Nasdaq
Brenmiller Energy vs. Nasdaq
Cleveland Cliffs vs. Nasdaq
Salesforce vs. Nasdaq
Visa vs. Nasdaq
Cia DE vs. Nasdaq
Alphabet vs. Nasdaq
Pacific Gas vs. Nasdaq
Otp Bank vs. Nasdaq
Sentinelone Inc vs. Nasdaq
Ford vs. Nasdaq
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 Nasdaq 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. Nasdaq'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, Nasdaq'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 Nasdaq.

Pair Trading with DOW and Nasdaq

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

DOW

Pair trading matchups for DOW

Salesforce vs. DOW
Citigroup vs. DOW
Sentinelone Inc vs. DOW
Ford vs. DOW
Visa vs. DOW
Otp Bank vs. DOW
Cia DE vs. DOW
Twitter vs. DOW
Pacific Gas vs. DOW
Vmware 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.
The idea behind DOW and Nasdaq 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.

Nasdaq

Pair trading matchups for Nasdaq

Cleveland Cliffs vs. Nasdaq
Cia DE vs. Nasdaq
Visa vs. Nasdaq
Otp Bank vs. Nasdaq
Twitter vs. Nasdaq
Salesforce vs. Nasdaq
Alphabet vs. Nasdaq
Ford vs. Nasdaq
Pacific Gas vs. Nasdaq
Sentinelone Inc vs. Nasdaq
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 Nasdaq 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. Nasdaq'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, Nasdaq'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 Nasdaq.
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 Piotroski F Score module to get Piotroski F Score based on binary analysis strategy of nine different fundamentals.

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