Correlation Between Dow Jones and Target Retirement

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

Diversification Opportunities for Dow Jones and Target Retirement

0.45

Correlation Coefficient

Dow Jones  Target Retirement

Very weak diversification

The 3 months correlation between Dow and Target is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Target Retirement Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target Retirement Income 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 Target Retirement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target Retirement Income has no effect on the direction of Dow Jones i.e., Dow Jones and Target Retirement go up and down completely randomly.

Pair Corralation between Dow Jones and Target Retirement

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 2.84 times more return on investment than Target Retirement. However, Dow Jones is 2.84 times more volatile than Target Retirement Income. It trades about 0.2 of its potential returns per unit of risk. Target Retirement Income is currently generating about 0.11 per unit of risk. If you would invest  4,093,693  in Dow Jones Industrial on September 2, 2024 and sell it today you would earn a total of  397,372  from holding Dow Jones Industrial or generate 9.71% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Target Retirement Income

Pair Trading with Dow Jones and Target Retirement

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

The idea behind Dow Jones Industrial and Target Retirement Income 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.