Correlation Between Custodian BCI and Dow Jones

Can any of the company-specific risk be diversified away by investing in both Custodian BCI 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 Custodian BCI and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Custodian BCI Balanced and Dow Jones Industrial, you can compare the effects of market volatilities on Custodian BCI 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 Custodian BCI with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Custodian BCI and Dow Jones.

Diversification Opportunities for Custodian BCI and Dow Jones

0.87

Correlation Coefficient

Custodian BCI  Dow Jones

Very poor diversification

The 3 months correlation between Custodian and Dow is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Custodian BCI Balanced 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 Custodian BCI 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 Custodian BCI Balanced 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 Custodian BCI i.e., Custodian BCI and Dow Jones go up and down completely randomly.

Pair Corralation between Custodian BCI and Dow Jones

Assuming the 90 days trading horizon Custodian BCI is expected to generate 1.53 times less return on investment than Dow Jones. But when comparing it to its historical volatility, Custodian BCI Balanced is 1.75 times less risky than Dow Jones. It trades about 0.16 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  4,139,378  in Dow Jones Industrial on September 13, 2024 and sell it today you would earn a total of  275,478  from holding Dow Jones Industrial or generate 6.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	96.83%
Values	Daily Returns

Custodian BCI Balanced  vs.  Dow Jones Industrial

Pair Trading with Custodian BCI and Dow Jones

The main advantage of trading using opposite Custodian BCI and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Custodian BCI 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' long position.

The idea behind Custodian BCI Balanced 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.

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 the Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.