Correlation Between Dow Jones and Investment Grade

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

Diversification Opportunities for Dow Jones and Investment Grade

-0.56

Correlation Coefficient

Dow Jones  Investment Grade

Excellent diversification

The 3 months correlation between Dow and Investment is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Investment Grade Porate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Grade Porate 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 Investment Grade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Grade Porate has no effect on the direction of Dow Jones i.e., Dow Jones and Investment Grade go up and down completely randomly.

Pair Corralation between Dow Jones and Investment Grade

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 2.38 times more return on investment than Investment Grade. However, Dow Jones is 2.38 times more volatile than Investment Grade Porate. It trades about 0.19 of its potential returns per unit of risk. Investment Grade Porate is currently generating about -0.03 per unit of risk. If you would invest  4,097,497  in Dow Jones Industrial on September 4, 2024 and sell it today you would earn a total of  373,056  from holding Dow Jones Industrial or generate 9.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Dow Jones Industrial  vs.  Investment Grade Porate

Pair Trading with Dow Jones and Investment Grade

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

The idea behind Dow Jones Industrial and Investment Grade Porate 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.