Correlation Between DOW and Adams Diversified

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

Diversification Opportunities for DOW and Adams Diversified

0.99
  Correlation Coefficient

No risk reduction

The 3 months correlation between DOW and Adams is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Adams Diversified Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Adams Diversified Equity 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 Adams Diversified. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Adams Diversified Equity has no effect on the direction of DOW i.e., DOW and Adams Diversified go up and down completely randomly.
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Pair Corralation between DOW and Adams Diversified

Given the investment horizon of 90 days DOW is expected to generate 1.32 times less return on investment than Adams Diversified. But when comparing it to its historical volatility, DOW is 1.14 times less risky than Adams Diversified. It trades about 0.05 of its potential returns per unit of risk. Adams Diversified Equity is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,273  in Adams Diversified Equity on May 17, 2022 and sell it today you would earn a total of  465.00  from holding Adams Diversified Equity or generate 36.53% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Adams Diversified Equity

 Performance (%) 
       Timeline  

DOW and Adams Diversified Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Equinix vs. DOW
Aspen Technology vs. DOW
Ford vs. DOW
Amazon vs. DOW
Wex vs. DOW
United Rentals vs. DOW
Graphic Packaging vs. DOW
Skyworks Solutions vs. DOW
Salesforce vs. DOW
Tenneco Automotive vs. DOW
Visa vs. DOW
Dupont Denemours 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.

Adams Diversified Equity

Pair trading matchups for Adams Diversified

Pair Trading with DOW and Adams Diversified

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

DOW

Pair trading matchups for DOW

Ford vs. DOW
Aspen Technology vs. DOW
Visa vs. DOW
Graphic Packaging vs. DOW
Salesforce vs. DOW
Walker Dunlop vs. DOW
Vmware vs. DOW
Oracle vs. DOW
Dupont Denemours vs. DOW
Tenneco Automotive vs. DOW
Skyworks Solutions 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 Adams Diversified Equity 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.

Adams Diversified Equity

Pair trading matchups for Adams Diversified

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.

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