Correlation Between Dow Jones and Northern Stock

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

Diversification Opportunities for Dow Jones and Northern Stock

0.94

Correlation Coefficient

Dow Jones  Northern Stock

Almost no diversification

The 3 months correlation between Dow and Northern is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Northern Stock Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Stock Index 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 Northern Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Stock Index has no effect on the direction of Dow Jones i.e., Dow Jones and Northern Stock go up and down completely randomly.

Pair Corralation between Dow Jones and Northern Stock

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.1 times less return on investment than Northern Stock. In addition to that, Dow Jones is 1.12 times more volatile than Northern Stock Index. It trades about 0.16 of its total potential returns per unit of risk. Northern Stock Index is currently generating about 0.2 per unit of volatility. If you would invest  5,744  in Northern Stock Index on September 12, 2024 and sell it today you would earn a total of  489.00  from holding Northern Stock Index or generate 8.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Dow Jones Industrial  vs.  Northern Stock Index

Pair Trading with Dow Jones and Northern Stock

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

The idea behind Dow Jones Industrial and Northern Stock Index 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.