Correlation Between Dow Jones and Wal-Mart

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

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

Diversification Opportunities for Dow Jones and Wal-Mart

0.76

Correlation Coefficient

Dow Jones  Wal-Mart

Poor diversification

The 3 months correlation between Dow and Wal-Mart is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Wal Mart de Mxico in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wal Mart de and Dow Jones 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 Dow Jones Industrial are associated (or correlated) with Wal-Mart. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wal Mart de has no effect on the direction of Dow Jones i.e., Dow Jones and Wal-Mart go up and down completely randomly.

Pair Corralation between Dow Jones and Wal-Mart

Assuming the 90 days trading horizon Dow Jones is expected to generate 18.01 times less return on investment than Wal-Mart. But when comparing it to its historical volatility, Dow Jones Industrial is 22.27 times less risky than Wal-Mart. It trades about 0.37 of its potential returns per unit of risk. Wal Mart de Mxico is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  83.00  in Wal Mart de Mxico on September 1, 2024 and sell it today you would earn a total of  163.00  from holding Wal Mart de Mxico or generate 196.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	91.3%
Values	Daily Returns

Dow Jones Industrial  vs.  Wal Mart de Mxico

Pair Trading with Dow Jones and Wal-Mart

The main advantage of trading using opposite Dow Jones and Wal-Mart positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow Jones position performs unexpectedly, Wal-Mart 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 Wal-Mart will offset losses from the drop in Wal-Mart's long position.

The idea behind Dow Jones Industrial and Wal Mart de Mxico 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.

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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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.