Correlation Between Dow Jones and Vanguard Long-term

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

Diversification Opportunities for Dow Jones and Vanguard Long-term

-0.54

Correlation Coefficient

Dow Jones  Vanguard Long-term

Excellent diversification

The 3 months correlation between Dow and Vanguard is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Vanguard Long Term Porate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Long Term 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 Vanguard Long-term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Long Term has no effect on the direction of Dow Jones i.e., Dow Jones and Vanguard Long-term go up and down completely randomly.

Pair Corralation between Dow Jones and Vanguard Long-term

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 1.18 times more return on investment than Vanguard Long-term. However, Dow Jones is 1.18 times more volatile than Vanguard Long Term Porate. It trades about 0.35 of its potential returns per unit of risk. Vanguard Long Term Porate is currently generating about 0.09 per unit of risk. If you would invest  4,179,460  in Dow Jones Industrial on September 5, 2024 and sell it today you would earn a total of  291,093  from holding Dow Jones Industrial or generate 6.96% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Vanguard Long Term Porate

Pair Trading with Dow Jones and Vanguard Long-term

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

The idea behind Dow Jones Industrial and Vanguard Long Term 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.