Correlation Between DOW and Etsy

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

Diversification Opportunities for DOW and Etsy

0.87
  Correlation Coefficient

Very poor diversification

The 3 months correlation between DOW and Etsy is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Etsy Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Etsy Inc 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 Etsy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Etsy Inc has no effect on the direction of DOW i.e., DOW and Etsy go up and down completely randomly.
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Pair Corralation between DOW and Etsy

Given the investment horizon of 90 days DOW is expected to under-perform the Etsy. But the index apears to be less risky and, when comparing its historical volatility, DOW is 3.5 times less risky than Etsy. The index trades about -0.16 of its potential returns per unit of risk. The Etsy Inc is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  8,112  in Etsy Inc on March 29, 2022 and sell it today you would lose (47.00)  from holding Etsy Inc or give up 0.58% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Etsy Inc

 Performance (%) 
      Timeline 

DOW and Etsy Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Conagra Brands vs. DOW
Cincinnati Financial vs. DOW
Chevron Corp vs. DOW
Macroaxis vs. DOW
Merck vs. DOW
Verizon Communications vs. DOW
Home Depot 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 Etsy

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

DOW

Pair trading matchups for DOW

Merck vs. DOW
Home Depot vs. DOW
Chevron Corp vs. DOW
Conagra Brands vs. DOW
Cincinnati Financial vs. DOW
Macroaxis vs. DOW
Verizon Communications vs. DOW
Teucrium Corn vs. DOW
Northrop Grumman 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 Etsy Inc 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.

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