Correlation Between DOW and One Choice

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

Diversification Opportunities for DOW and One Choice

0.73
  Correlation Coefficient

Poor diversification

The 3 months correlation between DOW and AAAKX is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding DOW and One Choice Blend in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on One Choice Blend 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 One Choice. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of One Choice Blend has no effect on the direction of DOW i.e., DOW and One Choice go up and down completely randomly.
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Pair Corralation between DOW and One Choice

Given the investment horizon of 90 days DOW is expected to generate 2.35 times more return on investment than One Choice. However, DOW is 2.35 times more volatile than One Choice Blend. It trades about 0.05 of its potential returns per unit of risk. One Choice Blend is currently generating about -0.04 per unit of risk. If you would invest  2,540,064  in DOW on February 17, 2022 and sell it today you would earn a total of  725,395  from holding DOW or generate 28.56% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy60.44%
ValuesDaily Returns

DOW  vs.  One Choice Blend

 Performance (%) 
      Timeline 

DOW and One Choice Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Ford vs. DOW
Sentinelone Inc vs. DOW
John Marshall vs. DOW
Citigroup vs. DOW
Vmware vs. DOW
Microsoft Corp vs. DOW
Olin Corp vs. DOW
Visa vs. DOW
Salesforce 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 DOW and One Choice

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

DOW

Pair trading matchups for DOW

Visa vs. DOW
Ford vs. DOW
Salesforce vs. DOW
Microsoft Corp vs. DOW
Vmware vs. DOW
Walker Dunlop vs. DOW
Sentinelone Inc vs. DOW
Olin Corp 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 One Choice Blend 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.
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 ETF Directory module to find actively traded Exchange Traded Funds (ETF) from around the world.

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