Correlation Between Dow Jones and Spot Coffee

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

Diversification Opportunities for Dow Jones and Spot Coffee

0.01

Correlation Coefficient

Dow Jones  Spot Coffee

Significant diversification

The 3 months correlation between Dow and Spot is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Spot Coffee in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Spot Coffee 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 Spot Coffee. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Spot Coffee has no effect on the direction of Dow Jones i.e., Dow Jones and Spot Coffee go up and down completely randomly.

Pair Corralation between Dow Jones and Spot Coffee

Assuming the 90 days trading horizon Dow Jones is expected to generate 21.98 times less return on investment than Spot Coffee. But when comparing it to its historical volatility, Dow Jones Industrial is 61.12 times less risky than Spot Coffee. It trades about 0.37 of its potential returns per unit of risk. Spot Coffee is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  0.20  in Spot Coffee on September 1, 2024 and sell it today you would earn a total of  0.00  from holding Spot Coffee or generate 0.0% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Spot Coffee

Pair Trading with Dow Jones and Spot Coffee

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

The idea behind Dow Jones Industrial and Spot Coffee 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.