Correlation Between DOW and EQUINOR ASA

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

Diversification Opportunities for DOW and EQUINOR ASA

0.46
  Correlation Coefficient

Very weak diversification

The 3 months correlation between DOW and EQUINOR is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding DOW and EQUINOR ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EQUINOR ASA 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 EQUINOR ASA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EQUINOR ASA has no effect on the direction of DOW i.e., DOW and EQUINOR ASA go up and down completely randomly.
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Pair Corralation between DOW and EQUINOR ASA

Given the investment horizon of 90 days DOW is expected to under-perform the EQUINOR ASA. But the index apears to be less risky and, when comparing its historical volatility, DOW is 2.81 times less risky than EQUINOR ASA. The index trades about -0.01 of its potential returns per unit of risk. The EQUINOR ASA is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2,060  in EQUINOR ASA on February 26, 2022 and sell it today you would earn a total of  1,626  from holding EQUINOR ASA or generate 78.93% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  EQUINOR ASA

 Performance (%) 
      Timeline 

DOW and EQUINOR ASA Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Ford vs. DOW
LINGYI ITECH vs. DOW
Walker Dunlop vs. DOW
HITHINK ROYALFLUSH vs. DOW
Vmware vs. DOW
Atlassian Cls vs. DOW
Meta Platforms vs. DOW
Visa vs. DOW
Citigroup vs. DOW
FUJIAN AONONG vs. DOW
Otp Bank 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.

EQUINOR ASA

Pair trading matchups for EQUINOR ASA

Pair Trading with DOW and EQUINOR ASA

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

DOW

Pair trading matchups for DOW

Vmware vs. DOW
Citigroup vs. DOW
LINGYI ITECH vs. DOW
Otp Bank vs. DOW
COSCO SHIPPING vs. DOW
Sentinelone Inc vs. DOW
Atlassian Cls vs. DOW
GM vs. DOW
Meta Platforms vs. DOW
FUJIAN AONONG vs. DOW
BANK OF NINGBO vs. DOW
Walker Dunlop 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 EQUINOR ASA 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.

EQUINOR ASA

Pair trading matchups for EQUINOR ASA

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 Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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