Correlation Between DOW and My Neighbor

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

Diversification Opportunities for DOW and My Neighbor

0.67
  Correlation Coefficient

Poor diversification

The 3 months correlation between DOW and ALICE is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding DOW and My Neighbor Alice in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on My Neighbor Alice 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 My Neighbor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of My Neighbor Alice has no effect on the direction of DOW i.e., DOW and My Neighbor go up and down completely randomly.
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Pair Corralation between DOW and My Neighbor

Given the investment horizon of 90 days DOW is expected to generate 6.69 times less return on investment than My Neighbor. But when comparing it to its historical volatility, DOW is 5.41 times less risky than My Neighbor. It trades about 0.26 of its potential returns per unit of risk. My Neighbor Alice is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  201.00  in My Neighbor Alice on May 10, 2022 and sell it today you would earn a total of  77.00  from holding My Neighbor Alice or generate 38.31% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  My Neighbor Alice

 Performance (%) 
       Timeline  

DOW and My Neighbor Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Shopify vs. DOW
Otp Bank vs. DOW
Canadian National vs. DOW
Enbridge vs. DOW
Amazon vs. DOW
Microsoft Corp vs. DOW
Alphabet vs. DOW
Tesla vs. DOW
Ultralife Corp vs. DOW
Coca Cola vs. DOW
Salesforce vs. DOW
Blink Charging 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 My Neighbor

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

DOW

Pair trading matchups for DOW

Amazon vs. DOW
Otp Bank vs. DOW
Microsoft Corp vs. DOW
Enbridge vs. DOW
Exxon vs. DOW
Ubiquiti Networks vs. DOW
Tencent Holdings vs. DOW
Alphabet vs. DOW
Ultralife Corp vs. DOW
Canadian National vs. DOW
Shopify 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 My Neighbor Alice 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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