Correlation Between Russell 2000 and Dow 2x

Can any of the company-specific risk be diversified away by investing in both Russell 2000 and Dow 2x 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 Russell 2000 and Dow 2x into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Russell 2000 2x and Dow 2x Strategy, you can compare the effects of market volatilities on Russell 2000 and Dow 2x 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 Russell 2000 with a short position of Dow 2x. Check out your portfolio center. Please also check ongoing floating volatility patterns of Russell 2000 and Dow 2x.

Diversification Opportunities for Russell 2000 and Dow 2x

0.93

Correlation Coefficient

Russell 2000  Dow 2x

Almost no diversification

The 3 months correlation between Russell and Dow is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Russell 2000 2x and Dow 2x Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow 2x Strategy and Russell 2000 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 Russell 2000 2x are associated (or correlated) with Dow 2x. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow 2x Strategy has no effect on the direction of Russell 2000 i.e., Russell 2000 and Dow 2x go up and down completely randomly.

Pair Corralation between Russell 2000 and Dow 2x

Assuming the 90 days horizon Russell 2000 2x is expected to generate 1.62 times more return on investment than Dow 2x. However, Russell 2000 is 1.62 times more volatile than Dow 2x Strategy. It trades about 0.08 of its potential returns per unit of risk. Dow 2x Strategy is currently generating about 0.07 per unit of risk. If you would invest  16,453  in Russell 2000 2x on September 15, 2024 and sell it today you would earn a total of  1,815  from holding Russell 2000 2x or generate 11.03% return on investment over 90 days.

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

Russell 2000 2x  vs.  Dow 2x Strategy

Russell 2000 2x

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Russell 2000 2x are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Russell 2000 may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Dow 2x Strategy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dow 2x Strategy are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Dow 2x may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Russell 2000 and Dow 2x

The main advantage of trading using opposite Russell 2000 and Dow 2x positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Russell 2000 position performs unexpectedly, Dow 2x 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 2x will offset losses from the drop in Dow 2x's long position.

The idea behind Russell 2000 2x and Dow 2x Strategy 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.

Check out your portfolio center.

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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.