Correlation Between Honest and DOW JONES

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

Diversification Opportunities for Honest and DOW JONES

-0.45
  Correlation Coefficient

Very good diversification

The 3 months correlation between Honest and DOW JONES is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Honest Company and DOW JONES INDUSTRIAL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW JONES INDUSTRIAL and Honest 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 Honest Company are associated (or correlated) with DOW JONES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW JONES INDUSTRIAL has no effect on the direction of Honest i.e., Honest and DOW JONES go up and down completely randomly.
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Pair Corralation between Honest and DOW JONES

Given the investment horizon of 90 days Honest Company is expected to under-perform the DOW JONES. In addition to that, Honest is 3.89 times more volatile than DOW JONES INDUSTRIAL. It trades about -0.07 of its total potential returns per unit of risk. DOW JONES INDUSTRIAL is currently generating about 0.37 per unit of volatility. If you would invest  2,920,288  in DOW JONES INDUSTRIAL on September 10, 2022 and sell it today you would earn a total of  538,689  from holding DOW JONES INDUSTRIAL or generate 18.45% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy88.37%
ValuesDaily Returns

Honest Company  vs.  DOW JONES INDUSTRIAL

 Performance (%) 
       Timeline  

Honest and DOW JONES Volatility Contrast

   Predicted Return Density   
       Returns  

DOW JONES INDUSTRIAL

Pair trading matchups for DOW JONES

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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.

Pair Trading with Honest and DOW JONES

The main advantage of trading using opposite Honest and DOW JONES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Honest position performs unexpectedly, DOW JONES 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 JONES will offset losses from the drop in DOW JONES's long position.
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The idea behind Honest Company and DOW JONES INDUSTRIAL 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.
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 JONES 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 JONES'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 JONES'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 JONES INDUSTRIAL.
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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.

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