Correlation Between DOW and Dai

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

Diversification Opportunities for DOW and Dai

0.1
  Correlation Coefficient

Average diversification

The 3 months correlation between DOW and Dai is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Dai in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dai 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 Dai. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dai has no effect on the direction of DOW i.e., DOW and Dai go up and down completely randomly.
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Pair Corralation between DOW and Dai

Given the investment horizon of 90 days DOW is expected to generate 8.69 times more return on investment than Dai. However, DOW is 8.69 times more volatile than Dai. It trades about 0.03 of its potential returns per unit of risk. Dai is currently generating about 0.0 per unit of risk. If you would invest  3,006,881  in DOW on August 31, 2022 and sell it today you would earn a total of  378,372  from holding DOW or generate 12.58% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy57.75%
ValuesDaily Returns

DOW  vs.  Dai

 Performance (%) 
       Timeline  

DOW and Dai 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.

Pair Trading with DOW and Dai

The main advantage of trading using opposite DOW and Dai positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, Dai 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 Dai will offset losses from the drop in Dai'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 Dai 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.
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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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .

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