Correlation Between Franklin and Dow Jones

Can any of the company-specific risk be diversified away by investing in both Franklin and Dow Jones 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 Franklin and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Franklin Government Securities and Dow Jones Industrial, you can compare the effects of market volatilities on Franklin and Dow Jones 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 Franklin with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Franklin and Dow Jones.

Diversification Opportunities for Franklin and Dow Jones

-0.66

Correlation Coefficient

Franklin  Dow Jones

Excellent diversification

The 3 months correlation between Franklin and Dow is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Franklin Government Securities and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial and Franklin 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 Franklin Government Securities are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of Franklin i.e., Franklin and Dow Jones go up and down completely randomly.

Pair Corralation between Franklin and Dow Jones

Assuming the 90 days horizon Franklin is expected to generate 7.27 times less return on investment than Dow Jones. But when comparing it to its historical volatility, Franklin Government Securities is 2.65 times less risky than Dow Jones. It trades about 0.14 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.38 of returns per unit of risk over similar time horizon. If you would invest  4,179,460  in Dow Jones Industrial on September 3, 2024 and sell it today you would earn a total of  311,605  from holding Dow Jones Industrial or generate 7.46% return on investment over 90 days.

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

Franklin Government Securities  vs.  Dow Jones Industrial

Pair Trading with Franklin and Dow Jones

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

The idea behind Franklin Government Securities and Dow Jones Industrial 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.