Correlation Between DOW and Micro Focus

Specify exactly 2 symbols:
Can any of the company-specific risk be diversified away by investing in both DOW and Micro Focus 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 Micro Focus into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and Micro Focus Intl, you can compare the effects of market volatilities on DOW and Micro Focus 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 Micro Focus. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and Micro Focus.

Diversification Opportunities for DOW and Micro Focus

0.24
  Correlation Coefficient

Modest diversification

The 3 months correlation between DOW and Micro is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Micro Focus Intl in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Micro Focus Intl 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 Micro Focus. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Micro Focus Intl has no effect on the direction of DOW i.e., DOW and Micro Focus go up and down completely randomly.
    Optimize

Pair Corralation between DOW and Micro Focus

Given the investment horizon of 90 days DOW is expected to generate 1.48 times less return on investment than Micro Focus. But when comparing it to its historical volatility, DOW is 3.65 times less risky than Micro Focus. It trades about 0.04 of its potential returns per unit of risk. Micro Focus Intl is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  368.00  in Micro Focus Intl on May 18, 2022 and sell it today you would lose (6.00)  from holding Micro Focus Intl or give up 1.63% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Micro Focus Intl

 Performance (%) 
       Timeline  

DOW and Micro Focus Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Abeona Therapeutics vs. DOW
Nvidia Corp vs. DOW
Microsoft Corp vs. DOW
Costco Wholesale vs. DOW
McDonalds Corp 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 Micro Focus

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

DOW

Pair trading matchups for DOW

Microsoft Corp vs. DOW
McDonalds Corp vs. DOW
Nvidia Corp vs. DOW
Costco Wholesale 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 Micro Focus Intl 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 Price Transformation module to use Price Transformation models to analyze depth of different equity instruments across global markets.

Other Complementary Tools

Portfolio Anywhere
Track or share privately all of your investments from the convenience of any device
Go
Premium Stories
Follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope
Go
Portfolio Manager
State of the art Portfolio Manager to monitor and improve performance of your invested capital
Go
Portfolio Suggestion
Get suggestions outside of your existing asset allocation including your own model portfolios
Go
Probability Of Bankruptcy
Get analysis of equity chance of financial distress in the next 2 years
Go
Portfolio Holdings
Check your current holdings and cash postion to detemine if your portfolio needs rebalancing
Go
Portfolio Diagnostics
Use generated alerts and portfolio events aggregator to diagnose current holdings
Go