Correlation Between Dow Jones and Retailing Fund

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

Diversification Opportunities for Dow Jones and Retailing Fund

0.86

Correlation Coefficient

Dow Jones  Retailing Fund

Very poor diversification

The 3 months correlation between Dow and Retailing is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Retailing Fund Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Retailing Fund Investor 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 Retailing Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Retailing Fund Investor has no effect on the direction of Dow Jones i.e., Dow Jones and Retailing Fund go up and down completely randomly.

Pair Corralation between Dow Jones and Retailing Fund

Assuming the 90 days trading horizon Dow Jones is expected to generate 1.14 times less return on investment than Retailing Fund. But when comparing it to its historical volatility, Dow Jones Industrial is 1.11 times less risky than Retailing Fund. It trades about 0.2 of its potential returns per unit of risk. Retailing Fund Investor is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  4,988  in Retailing Fund Investor on September 2, 2024 and sell it today you would earn a total of  555.00  from holding Retailing Fund Investor or generate 11.13% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Retailing Fund Investor

Pair Trading with Dow Jones and Retailing Fund

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

The idea behind Dow Jones Industrial and Retailing Fund Investor 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.