Correlation Between DOW and American Beacon

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

Diversification Opportunities for DOW and American Beacon

0.89
  Correlation Coefficient

Very poor diversification

The 3 months correlation between DOW and American is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding DOW and American Beacon Mid-Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Beacon Mid-Cap 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 American Beacon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Beacon Mid-Cap has no effect on the direction of DOW i.e., DOW and American Beacon go up and down completely randomly.
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Pair Corralation between DOW and American Beacon

Given the investment horizon of 90 days DOW is expected to generate 2.24 times less return on investment than American Beacon. But when comparing it to its historical volatility, DOW is 1.43 times less risky than American Beacon. It trades about 0.04 of its potential returns per unit of risk. American Beacon Mid-Cap is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,194  in American Beacon Mid-Cap on May 9, 2022 and sell it today you would earn a total of  537.00  from holding American Beacon Mid-Cap or generate 44.97% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy99.8%
ValuesDaily Returns

DOW  vs.  American Beacon Mid-Cap

 Performance (%) 
       Timeline  

DOW and American Beacon Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Alphabet vs. DOW
Tejon Ranch vs. DOW
Kennedy-Wilson Holdings vs. DOW
Microsoft Corp vs. DOW
Oracle vs. DOW
Amazon vs. DOW
Walker Dunlop vs. DOW
Manufactured Housing vs. DOW
Citigroup 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.

American Beacon Mid-Cap

Pair trading matchups for American Beacon

Pair Trading with DOW and American Beacon

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

DOW

Pair trading matchups for DOW

Vmware vs. DOW
Alphabet vs. DOW
Microsoft Corp vs. DOW
Universal Logis vs. DOW
Visteon Corp vs. DOW
Amazon vs. DOW
Tejon Ranch vs. DOW
Manufactured Housing vs. DOW
Franklin Covey vs. DOW
Kennedy-Wilson Holdings 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 American Beacon Mid-Cap 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.

American Beacon Mid-Cap

Pair trading matchups for American Beacon

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 Shere Portfolio module to track or share privately all of your investments from the convenience of any device.

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