Correlation Between DOW and Cisco Systems

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

Diversification Opportunities for DOW and Cisco Systems

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between DOW and Cisco is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of DOW i.e., DOW and Cisco Systems go up and down completely randomly.
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Pair Corralation between DOW and Cisco Systems

Given the investment horizon of 90 days DOW is expected to generate 0.63 times more return on investment than Cisco Systems. However, DOW is 1.59 times less risky than Cisco Systems. It trades about -0.01 of its potential returns per unit of risk. Cisco Systems is currently generating about -0.07 per unit of risk. If you would invest  3,493,216  in DOW on May 19, 2022 and sell it today you would lose (78,015)  from holding DOW or give up 2.23% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy99.4%
ValuesDaily Returns

DOW  vs.  Cisco Systems

 Performance (%) 
       Timeline  

DOW and Cisco Systems Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Goldman Sachs vs. DOW
Dupont Denemours vs. DOW
Invesco Solar vs. DOW
Devon Energy vs. DOW
Salesforce vs. DOW
ConocoPhillips vs. DOW
Zimmer Biomet vs. DOW
Lam Research vs. DOW
Bristol-Myers Squibb vs. DOW
Stryker Corp vs. DOW
Citigroup vs. DOW
Otp Bank 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 Cisco Systems

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

DOW

Pair trading matchups for DOW

Salesforce vs. DOW
Citigroup vs. DOW
ConocoPhillips vs. DOW
Zimmer Biomet vs. DOW
Dupont Denemours vs. DOW
Bristol-Myers Squibb vs. DOW
Sentinelone Inc vs. DOW
Alphabet vs. DOW
Devon Energy vs. DOW
Stryker Corp vs. DOW
T Rowe vs. DOW
Goldman Sachs 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 Cisco Systems 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.

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