Correlation Between Dow Jones and ALM Equity

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

Diversification Opportunities for Dow Jones and ALM Equity

-0.01

Correlation Coefficient

Dow Jones  ALM Equity

Good diversification

The 3 months correlation between Dow and ALM is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and ALM Equity AB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ALM Equity AB 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 ALM Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ALM Equity AB has no effect on the direction of Dow Jones i.e., Dow Jones and ALM Equity go up and down completely randomly.

Pair Corralation between Dow Jones and ALM Equity

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 0.3 times more return on investment than ALM Equity. However, Dow Jones Industrial is 3.33 times less risky than ALM Equity. It trades about 0.24 of its potential returns per unit of risk. ALM Equity AB is currently generating about -0.08 per unit of risk. If you would invest  3,960,657  in Dow Jones Industrial on April 23, 2025 and sell it today you would earn a total of  471,650  from holding Dow Jones Industrial or generate 11.91% return on investment over 90 days.

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

Dow Jones Industrial  vs.  ALM Equity AB

Pair Trading with Dow Jones and ALM Equity

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

The idea behind Dow Jones Industrial and ALM Equity AB 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.