Correlation Between DOW and Band Protocol

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

Diversification Opportunities for DOW and Band Protocol

0.79
  Correlation Coefficient

Poor diversification

The 3 months correlation between DOW and Band Protocol is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Band Protocol in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Band Protocol 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 Band Protocol. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Band Protocol has no effect on the direction of DOW i.e., DOW and Band Protocol go up and down completely randomly.
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Pair Corralation between DOW and Band Protocol

Given the investment horizon of 90 days DOW is expected to under-perform the Band Protocol. But the index apears to be less risky and, when comparing its historical volatility, DOW is 4.06 times less risky than Band Protocol. The index trades about -0.28 of its potential returns per unit of risk. The Band Protocol is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  123.00  in Band Protocol on June 30, 2022 and sell it today you would earn a total of  6.00  from holding Band Protocol or generate 4.88% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy72.73%
ValuesDaily Returns

DOW  vs.  Band Protocol

 Performance (%) 
       Timeline  

DOW and Band Protocol Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for 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.

Band Protocol

Pair trading matchups for Band Protocol

Pair Trading with DOW and Band Protocol

The main advantage of trading using opposite DOW and Band Protocol positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, Band Protocol 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 Band Protocol will offset losses from the drop in Band Protocol's long position.
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 Band Protocol 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.
Band Protocol vs. Staked Ether
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.

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