Correlation Between Occidental Petroleum and DOW

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

Diversification Opportunities for Occidental Petroleum and DOW

0.72
  Correlation Coefficient

Poor diversification

The 3 months correlation between Occidental and DOW is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Occidental Petroleum Corp and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and Occidental Petroleum 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 Occidental Petroleum Corp 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 Occidental Petroleum i.e., Occidental Petroleum and DOW go up and down completely randomly.
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Pair Corralation between Occidental Petroleum and DOW

Considering the 90-day investment horizon Occidental Petroleum is expected to generate 1.1 times less return on investment than DOW. In addition to that, Occidental Petroleum is 3.85 times more volatile than DOW. It trades about 0.11 of its total potential returns per unit of risk. DOW is currently generating about 0.49 per unit of volatility. If you would invest  3,107,261  in DOW on May 18, 2022 and sell it today you would earn a total of  283,983  from holding DOW or generate 9.14% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Occidental Petroleum Corp  vs.  DOW

 Performance (%) 
       Timeline  

Occidental Petroleum and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

McDonalds Corp vs. DOW
Nvidia Corp vs. DOW
Microsoft Corp vs. DOW
Abbott Laboratories vs. DOW
Costco Wholesale vs. DOW
Abeona Therapeutics 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 Occidental Petroleum and DOW

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

Nvidia Corp vs. DOW
Microsoft Corp vs. DOW
Abeona Therapeutics vs. DOW
Costco Wholesale 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..

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