Correlation Between Dow Jones and EDP Renovaveis

Can any of the company-specific risk be diversified away by investing in both Dow Jones and EDP Renovaveis 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 EDP Renovaveis 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 EDP Renovaveis, you can compare the effects of market volatilities on Dow Jones and EDP Renovaveis 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 EDP Renovaveis. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and EDP Renovaveis.

Diversification Opportunities for Dow Jones and EDP Renovaveis

-0.72

Correlation Coefficient

Dow Jones  EDP Renovaveis

Pay attention - limited upside

The 3 months correlation between Dow and EDP is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and EDP Renovaveis in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EDP Renovaveis 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 EDP Renovaveis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EDP Renovaveis has no effect on the direction of Dow Jones i.e., Dow Jones and EDP Renovaveis go up and down completely randomly.

Pair Corralation between Dow Jones and EDP Renovaveis

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 0.32 times more return on investment than EDP Renovaveis. However, Dow Jones Industrial is 3.15 times less risky than EDP Renovaveis. It trades about 0.37 of its potential returns per unit of risk. EDP Renovaveis is currently generating about -0.24 per unit of risk. If you would invest  4,176,346  in Dow Jones Industrial on September 1, 2024 and sell it today you would earn a total of  314,719  from holding Dow Jones Industrial or generate 7.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  EDP Renovaveis

Pair Trading with Dow Jones and EDP Renovaveis

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

The idea behind Dow Jones Industrial and EDP Renovaveis 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.