Correlation Between Optimum Small and DOW

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

Diversification Opportunities for Optimum Small and DOW

0.82
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Optimum and DOW is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Optimum Small Cap and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Optimum Small 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 Optimum Small Cap 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 Optimum Small i.e., Optimum Small and DOW go up and down completely randomly.
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Pair Corralation between Optimum Small and DOW

Assuming the 90 days horizon Optimum Small Cap is expected to generate 1.63 times more return on investment than DOW. However, Optimum Small is 1.63 times more volatile than DOW. It trades about 0.03 of its potential returns per unit of risk. DOW is currently generating about 0.04 per unit of risk. If you would invest  954.00  in Optimum Small Cap on May 18, 2022 and sell it today you would earn a total of  209.00  from holding Optimum Small Cap or generate 21.91% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy99.8%
ValuesDaily Returns

Optimum Small Cap  vs.  DOW

 Performance (%) 
       Timeline  

Optimum Small and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

Optimum Small Cap

Pair trading matchups for Optimum Small

DOW

Pair trading matchups for DOW

Costco Wholesale vs. DOW
Abeona Therapeutics vs. DOW
Microsoft Corp vs. DOW
Abbott Laboratories vs. DOW
Nvidia Corp vs. DOW
McDonalds Corp 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 Optimum Small and DOW

The main advantage of trading using opposite Optimum Small and DOW positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Optimum Small 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.

Optimum Small Cap

Pair trading matchups for Optimum Small

The idea behind Optimum Small Cap 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

Abeona Therapeutics vs. DOW
Nvidia Corp vs. DOW
Costco Wholesale vs. DOW
Microsoft Corp vs. DOW
McDonalds Corp vs. DOW
Abbott Laboratories 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.

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