Correlation Between NYSE and DOW

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

Diversification Opportunities for NYSE and DOW

0.91
  Correlation Coefficient

Almost no diversification

The 3 months correlation between NYSE and DOW is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding NYSE and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and NYSE 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 NYSE are associated (or correlated) with DOW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW has no effect on the direction of NYSE i.e., NYSE and DOW go up and down completely randomly.
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Pair Corralation between NYSE and DOW

Given the investment horizon of 90 days NYSE is expected to under-perform the DOW. In addition to that, NYSE is 1.11 times more volatile than DOW. It trades about -0.09 of its total potential returns per unit of risk. DOW is currently generating about 0.0 per unit of volatility. If you would invest  3,330,193  in DOW on February 26, 2022 and sell it today you would lose (8,897)  from holding DOW or give up 0.27% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

NYSE  vs.  DOW

 Performance (%) 
      Timeline 

NYSE and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

NYSE

Pair trading matchups for NYSE

Vmware vs. NYSE
Visa vs. NYSE
Meta Platforms vs. NYSE
LINGYI ITECH vs. NYSE
GM vs. NYSE
Ford vs. NYSE
Atlassian Cls vs. NYSE
COSCO SHIPPING vs. NYSE
Sentinelone Inc vs. NYSE
BANK OF NINGBO vs. NYSE
Walker Dunlop vs. NYSE
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 NYSE 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. NYSE'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, NYSE'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 NYSE.

DOW

Pair trading matchups for DOW

Salesforce vs. DOW
FUJIAN AONONG vs. DOW
Visa vs. DOW
Ford vs. DOW
HITHINK ROYALFLUSH vs. DOW
Meta Platforms vs. DOW
Otp Bank vs. DOW
GM vs. DOW
Vmware vs. DOW
Microsoft Corp vs. DOW
COSCO SHIPPING 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 NYSE and DOW

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

NYSE

Pair trading matchups for NYSE

Salesforce vs. NYSE
Meta Platforms vs. NYSE
Atlassian Cls vs. NYSE
BANK OF NINGBO vs. NYSE
Otp Bank vs. NYSE
LINGYI ITECH vs. NYSE
Ford vs. NYSE
GM vs. NYSE
Vmware vs. NYSE
FUJIAN AONONG vs. NYSE
Sentinelone Inc vs. NYSE
COSCO SHIPPING vs. NYSE
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 NYSE 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. NYSE'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, NYSE'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 NYSE.
The idea behind NYSE and DOW 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.

DOW

Pair trading matchups for DOW

Ford vs. DOW
Otp Bank vs. DOW
Meta Platforms vs. DOW
Atlassian Cls vs. DOW
Microsoft Corp vs. DOW
BANK OF NINGBO vs. DOW
COSCO SHIPPING vs. DOW
Vmware vs. DOW
Walker Dunlop vs. DOW
Citigroup 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.
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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.

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