Correlation Between Dow and Westlake Chemical
Can any of the company-specific risk be diversified away by investing in both Dow and Westlake Chemical 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 and Westlake Chemical into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dow Inc and Westlake Chemical, you can compare the effects of market volatilities on Dow and Westlake Chemical 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 with a short position of Westlake Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow and Westlake Chemical.
Diversification Opportunities for Dow and Westlake Chemical
0.82 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Dow and Westlake is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Dow Inc and Westlake Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westlake Chemical and Dow 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 Inc are associated (or correlated) with Westlake Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westlake Chemical has no effect on the direction of Dow i.e., Dow and Westlake Chemical go up and down completely randomly.
Pair Corralation between Dow and Westlake Chemical
Considering the 90-day investment horizon Dow Inc is expected to under-perform the Westlake Chemical. But the stock apears to be less risky and, when comparing its historical volatility, Dow Inc is 1.35 times less risky than Westlake Chemical. The stock trades about 0.0 of its potential returns per unit of risk. The Westlake Chemical is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 12,391 in Westlake Chemical on January 20, 2024 and sell it today you would earn a total of 2,503 from holding Westlake Chemical or generate 20.2% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Dow Inc vs. Westlake Chemical
Performance |
| Timeline |
| Dow Inc |
| Westlake Chemical |
Dow and Westlake Chemical Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Dow and Westlake Chemical
The main advantage of trading using opposite Dow and Westlake Chemical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dow position performs unexpectedly, Westlake Chemical 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 Westlake Chemical will offset losses from the drop in Westlake Chemical's long position.The idea behind Dow Inc and Westlake Chemical 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.| Westlake Chemical vs. Perimeter Solutions SA | Westlake Chemical vs. Sensient Technologies | Westlake Chemical vs. Element Solutions | Westlake Chemical vs. Quaker Chemical |
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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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