Correlation Between Direxion Daily and ProShares UltraShort

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

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

Diversification Opportunities for Direxion Daily and ProShares UltraShort

-0.41

Correlation Coefficient

Direxion Daily  ProShares UltraShort

Very good diversification

The 3 months correlation between Direxion and ProShares is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Direxion Daily Dow and ProShares UltraShort Basic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraShort and Direxion Daily 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 Direxion Daily Dow are associated (or correlated) with ProShares UltraShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraShort has no effect on the direction of Direxion Daily i.e., Direxion Daily and ProShares UltraShort go up and down completely randomly.

Pair Corralation between Direxion Daily and ProShares UltraShort

Given the investment horizon of 90 days Direxion Daily Dow is expected to under-perform the ProShares UltraShort. In addition to that, Direxion Daily is 2.61 times more volatile than ProShares UltraShort Basic. It trades about -0.12 of its total potential returns per unit of risk. ProShares UltraShort Basic is currently generating about 0.2 per unit of volatility. If you would invest  695.00  in ProShares UltraShort Basic on January 31, 2024 and sell it today you would earn a total of  45.00  from holding ProShares UltraShort Basic or generate 6.47% return on investment over 90 days.

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

Direxion Daily Dow  vs.  ProShares UltraShort Basic

Direxion Daily Dow

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Direxion Daily Dow are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting fundamental drivers, Direxion Daily may actually be approaching a critical reversion point that can send shares even higher in May 2024.

ProShares UltraShort

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ProShares UltraShort Basic has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of sluggish performance in the last few months, the Etf's primary indicators remain very healthy which may send shares a bit higher in May 2024. The recent disarray may also be a sign of long period up-swing for the ETF investors.

Pair Trading with Direxion Daily and ProShares UltraShort

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

The idea behind Direxion Daily Dow and ProShares UltraShort Basic 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.