Correlation Between US Oil and DOW

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

Diversification Opportunities for US Oil and DOW

-0.06
  Correlation Coefficient

Good diversification

The 3 months correlation between US Oil and DOW is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding US Oil Fund and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW and US Oil 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 US Oil Fund 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 US Oil i.e., US Oil and DOW go up and down completely randomly.
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Pair Corralation between US Oil and DOW

Considering the 90-day investment horizon US Oil Fund is expected to generate 2.36 times more return on investment than DOW. However, US Oil is 2.36 times more volatile than DOW. It trades about 0.09 of its potential returns per unit of risk. DOW is currently generating about 0.04 per unit of risk. If you would invest  3,092  in US Oil Fund on May 17, 2022 and sell it today you would earn a total of  4,406  from holding US Oil Fund or generate 142.5% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy99.8%
ValuesDaily Returns

US Oil Fund  vs.  DOW

 Performance (%) 
       Timeline  

US Oil and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

US Oil Fund

Pair trading matchups for US Oil

Amazon vs. US Oil
Qualcomm vs. US Oil
Aspen Technology vs. US Oil
Visa vs. US Oil
Vmware vs. US Oil
United Rentals vs. US Oil
Walker Dunlop vs. US Oil
Tenneco Automotive vs. US Oil
Salesforce vs. US Oil
Wex vs. US Oil
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 US Oil 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. US Oil'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, US Oil'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 US Oil Fund.

DOW

Pair trading matchups for DOW

Wex vs. DOW
Qualcomm vs. DOW
Aspen Technology vs. DOW
Amazon vs. DOW
Tenneco Automotive vs. DOW
Boeing vs. DOW
Oracle vs. DOW
Salesforce vs. DOW
United Rentals vs. DOW
Ford vs. DOW
Dupont Denemours 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 US Oil and DOW

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

US Oil Fund

Pair trading matchups for US Oil

Visa vs. US Oil
Salesforce vs. US Oil
Sentinelone Inc vs. US Oil
Dupont Denemours vs. US Oil
Amazon vs. US Oil
Wex vs. US Oil
Qualcomm vs. US Oil
Equinix vs. US Oil
Graphic Packaging vs. US Oil
United Rentals vs. US Oil
Walker Dunlop vs. US Oil
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 US Oil 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. US Oil'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, US Oil'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 US Oil Fund.
The idea behind US Oil Fund 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

United Rentals vs. DOW
Vmware vs. DOW
Boeing vs. DOW
Oracle vs. DOW
Tenneco Automotive vs. DOW
Dupont Denemours vs. DOW
Qualcomm vs. DOW
Equinix vs. DOW
Walker Dunlop vs. DOW
Salesforce vs. DOW
Amazon vs. DOW
Sentinelone Inc 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.

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