Correlation Between DOW and T.J. Maxx

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

Diversification Opportunities for DOW and T.J. Maxx

0.6
  Correlation Coefficient

Poor diversification

The 3 months correlation between DOW and T.J. Maxx is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding DOW and TJX Companies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TJX Companies 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 T.J. Maxx. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TJX Companies has no effect on the direction of DOW i.e., DOW and T.J. Maxx go up and down completely randomly.
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Pair Corralation between DOW and T.J. Maxx

Given the investment horizon of 90 days DOW is expected to under-perform the T.J. Maxx. But the index apears to be less risky and, when comparing its historical volatility, DOW is 1.83 times less risky than T.J. Maxx. The index trades about -0.07 of its potential returns per unit of risk. The TJX Companies is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  6,501  in TJX Companies on June 26, 2022 and sell it today you would lose (374.00)  from holding TJX Companies or give up 5.75% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  TJX Companies

 Performance (%) 
       Timeline  

DOW and T.J. Maxx Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for 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.

TJX Companies

Pair trading matchups for T.J. Maxx

Pair Trading with DOW and T.J. Maxx

The main advantage of trading using opposite DOW and T.J. Maxx positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW position performs unexpectedly, T.J. Maxx 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 T.J. Maxx will offset losses from the drop in T.J. Maxx's long position.
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 TJX Companies 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.
T.J. Maxx vs. Industrias Bachoco SA
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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..

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