Correlation Between DOW and Q3 All-Weather

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Can any of the company-specific risk be diversified away by investing in both DOW and Q3 All-Weather 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 Q3 All-Weather into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and Q3 All-Weather Sector, you can compare the effects of market volatilities on DOW and Q3 All-Weather 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 Q3 All-Weather. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and Q3 All-Weather.

Diversification Opportunities for DOW and Q3 All-Weather

0.9
  Correlation Coefficient

Almost no diversification

The 3 months correlation between DOW and QAWSX is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Q3 All-Weather Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Q3 All-Weather Sector 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 Q3 All-Weather. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Q3 All-Weather Sector has no effect on the direction of DOW i.e., DOW and Q3 All-Weather go up and down completely randomly.
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Pair Corralation between DOW and Q3 All-Weather

Given the investment horizon of 90 days DOW is expected to generate 1.01 times more return on investment than Q3 All-Weather. However, DOW is 1.01 times more volatile than Q3 All-Weather Sector. It trades about -0.04 of its potential returns per unit of risk. Q3 All-Weather Sector is currently generating about -0.07 per unit of risk. If you would invest  3,475,639  in DOW on March 31, 2022 and sell it today you would lose (380,940)  from holding DOW or give up 10.96% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy99.63%
ValuesDaily Returns

DOW  vs.  Q3 All-Weather Sector

 Performance (%) 
      Timeline 

DOW and Q3 All-Weather Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Star Bulk vs. DOW
U S vs. DOW
San Juan vs. DOW
Daqo New vs. DOW
American Manganese vs. DOW
Valhi vs. DOW
Geely Automobile vs. DOW
Gran Tierra vs. DOW
Burford Capital vs. DOW
Radian vs. DOW
TOURMALINE OIL vs. DOW
Kroger 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.

Q3 All-Weather Sector

Pair trading matchups for Q3 All-Weather

Pair Trading with DOW and Q3 All-Weather

The main advantage of trading using opposite DOW and Q3 All-Weather positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, Q3 All-Weather 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 Q3 All-Weather will offset losses from the drop in Q3 All-Weather's long position.

DOW

Pair trading matchups for DOW

Walgreens Boots vs. DOW
Geely Automobile vs. DOW
Star Bulk vs. DOW
San Juan vs. DOW
Radian vs. DOW
TOURMALINE OIL vs. DOW
American Manganese vs. DOW
Genie Energy vs. DOW
Valhi 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 Q3 All-Weather Sector 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.

Q3 All-Weather Sector

Pair trading matchups for Q3 All-Weather

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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