Correlation Between DIA and RedStone

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

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

Diversification Opportunities for DIA and RedStone

0.79

Correlation Coefficient

DIA  RedStone

Poor diversification

The 3 months correlation between DIA and RedStone is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding DIA and RedStone in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RedStone and DIA 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 DIA are associated (or correlated) with RedStone. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RedStone has no effect on the direction of DIA i.e., DIA and RedStone go up and down completely randomly.

Pair Corralation between DIA and RedStone

Assuming the 90 days trading horizon DIA is expected to generate 1.07 times more return on investment than RedStone. However, DIA is 1.07 times more volatile than RedStone. It trades about 0.04 of its potential returns per unit of risk. RedStone is currently generating about -0.01 per unit of risk. If you would invest  42.00  in DIA on April 20, 2025 and sell it today you would earn a total of  2.00  from holding DIA or generate 4.76% return on investment over 90 days.

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

DIA  vs.  RedStone

DIA

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in DIA are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, DIA exhibited solid returns over the last few months and may actually be approaching a breakup point.

RedStone

Risk-Adjusted Performance

Very Weak

Over the last 90 days RedStone has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, RedStone is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with DIA and RedStone

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

The idea behind DIA and RedStone 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.