Correlation Between Dow Jones and Optical Cable

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

Diversification Opportunities for Dow Jones and Optical Cable

-0.24

Correlation Coefficient

Dow Jones  Optical Cable

Very good diversification

The 3 months correlation between Dow and Optical is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Optical Cable in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Optical Cable 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 Optical Cable. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Optical Cable has no effect on the direction of Dow Jones i.e., Dow Jones and Optical Cable go up and down completely randomly.

Pair Corralation between Dow Jones and Optical Cable

Assuming the 90 days trading horizon Dow Jones is expected to generate 29.82 times less return on investment than Optical Cable. But when comparing it to its historical volatility, Dow Jones Industrial is 77.29 times less risky than Optical Cable. It trades about 0.12 of its potential returns per unit of risk. Optical Cable is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  400.00  in Optical Cable on September 1, 2024 and sell it today you would lose (167.00) from holding Optical Cable or give up 41.75% of portfolio value over 90 days.

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

Dow Jones Industrial  vs.  Optical Cable

Pair Trading with Dow Jones and Optical Cable

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

The idea behind Dow Jones Industrial and Optical Cable 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.