Correlation Between DOW and 3M

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Can any of the company-specific risk be diversified away by investing in both DOW and 3M 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 3M into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and 3M Company, you can compare the effects of market volatilities on DOW and 3M 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 3M. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and 3M.

Diversification Opportunities for DOW and 3M

0.83
  Correlation Coefficient

Very poor diversification

The 3 months correlation between DOW and 3M is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding DOW and 3M Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 3M Company 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 3M. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 3M Company has no effect on the direction of DOW i.e., DOW and 3M go up and down completely randomly.
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Pair Corralation between DOW and 3M

Given the investment horizon of 90 days DOW is expected to generate 0.75 times more return on investment than 3M. However, DOW is 1.34 times less risky than 3M. It trades about 0.04 of its potential returns per unit of risk. 3M Company is currently generating about 0.0 per unit of risk. If you would invest  2,849,227  in DOW on May 19, 2022 and sell it today you would earn a total of  543,670  from holding DOW or generate 19.08% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  3M Company

 Performance (%) 
       Timeline  

DOW and 3M Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Sentinelone Inc vs. DOW
Stryker Corp vs. DOW
Zimmer Biomet vs. DOW
Nio Inc vs. DOW
Alphabet vs. DOW
Goldman Sachs vs. DOW
Lam Research vs. DOW
Johnson Johnson vs. DOW
Otp Bank vs. DOW
Main Street vs. DOW
T Rowe vs. DOW
Salesforce 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.

3M Company

Pair trading matchups for 3M

Pair Trading with DOW and 3M

The main advantage of trading using opposite DOW and 3M positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, 3M 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 3M will offset losses from the drop in 3M's long position.

DOW

Pair trading matchups for DOW

Bristol-Myers Squibb vs. DOW
Main Street vs. DOW
Salesforce vs. DOW
B of A vs. DOW
Stryker Corp vs. DOW
Invesco Solar vs. DOW
Otp Bank vs. DOW
Dupont Denemours vs. DOW
Devon Energy vs. DOW
Nio Inc vs. DOW
Goldman Sachs vs. DOW
Sentinelone Inc 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 3M Company 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.

3M Company

Pair trading matchups for 3M

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 Probability Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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