Correlation Between Alibaba Group and DOW

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

Diversification Opportunities for Alibaba Group and DOW

0.24
  Correlation Coefficient

Modest diversification

The 3 months correlation between Alibaba and DOW is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Alibaba Group Holding and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Alibaba Group 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 Alibaba Group Holding 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 Alibaba Group i.e., Alibaba Group and DOW go up and down completely randomly.
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Pair Corralation between Alibaba Group and DOW

Given the investment horizon of 90 days Alibaba Group Holding is expected to generate 3.48 times more return on investment than DOW. However, Alibaba Group is 3.48 times more volatile than DOW. It trades about 0.17 of its potential returns per unit of risk. DOW is currently generating about -0.07 per unit of risk. If you would invest  8,399  in Alibaba Group Holding on March 27, 2022 and sell it today you would earn a total of  3,363  from holding Alibaba Group Holding or generate 40.04% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Alibaba Group Holding  vs.  DOW

 Performance (%) 
      Timeline 

Alibaba Group and DOW Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

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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 Alibaba Group and DOW

The main advantage of trading using opposite Alibaba Group and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alibaba Group 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.
The idea behind Alibaba Group Holding 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

Ally Financial vs. DOW
CalAmp Corp vs. DOW
DB Commodity vs. DOW
Concrete Pumping vs. DOW
Kar Auction vs. DOW
Coinbase Global vs. DOW
Upstart Holdings vs. DOW
Weyco Gp vs. DOW
SP 500 vs. DOW
Infineon Tech vs. DOW
SP 500 vs. DOW
BERKSHIRE HATHAWAY 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.

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