Correlation Between Dow Jones and London Stock

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

Diversification Opportunities for Dow Jones and London Stock

0.77

Correlation Coefficient

Dow Jones  London Stock

Poor diversification

The 3 months correlation between Dow and London is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange 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 London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of Dow Jones i.e., Dow Jones and London Stock go up and down completely randomly.

Pair Corralation between Dow Jones and London Stock

Assuming the 90 days trading horizon Dow Jones Industrial is expected to under-perform the London Stock. In addition to that, Dow Jones is 1.07 times more volatile than London Stock Exchange. It trades about -0.14 of its total potential returns per unit of risk. London Stock Exchange is currently generating about 0.43 per unit of volatility. If you would invest  1,071,000  in London Stock Exchange on September 19, 2024 and sell it today you would earn a total of  78,500  from holding London Stock Exchange or generate 7.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.65%
Values	Daily Returns

Dow Jones Industrial  vs.  London Stock Exchange

Pair Trading with Dow Jones and London Stock

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

The idea behind Dow Jones Industrial and London Stock Exchange 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.