Correlation Between Dow 2x and Hennessy Large

Can any of the company-specific risk be diversified away by investing in both Dow 2x and Hennessy Large 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 2x and Hennessy Large into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Dow 2x Strategy and Hennessy Large Cap, you can compare the effects of market volatilities on Dow 2x and Hennessy Large 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 2x with a short position of Hennessy Large. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow 2x and Hennessy Large.

Diversification Opportunities for Dow 2x and Hennessy Large

0.76

Correlation Coefficient

Dow 2x  Hennessy Large

Poor diversification

The 3 months correlation between Dow and Hennessy is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Dow 2x Strategy and Hennessy Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Large Cap and Dow 2x 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 2x Strategy are associated (or correlated) with Hennessy Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Large Cap has no effect on the direction of Dow 2x i.e., Dow 2x and Hennessy Large go up and down completely randomly.

Pair Corralation between Dow 2x and Hennessy Large

Assuming the 90 days horizon Dow 2x Strategy is expected to generate 0.98 times more return on investment than Hennessy Large. However, Dow 2x Strategy is 1.02 times less risky than Hennessy Large. It trades about 0.06 of its potential returns per unit of risk. Hennessy Large Cap is currently generating about 0.04 per unit of risk. If you would invest  12,068  in Dow 2x Strategy on September 27, 2024 and sell it today you would earn a total of  5,308  from holding Dow 2x Strategy or generate 43.98% return on investment over 90 days.

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

Dow 2x Strategy  vs.  Hennessy Large Cap

Dow 2x Strategy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dow 2x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Dow 2x is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Hennessy Large Cap

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Hennessy Large Cap are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Hennessy Large showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dow 2x and Hennessy Large

The main advantage of trading using opposite Dow 2x and Hennessy Large positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow 2x position performs unexpectedly, Hennessy Large 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 Hennessy Large will offset losses from the drop in Hennessy Large's long position.

The idea behind Dow 2x Strategy and Hennessy Large Cap 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.