Correlation Between Dow Jones and Moderate Strategy

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

Diversification Opportunities for Dow Jones and Moderate Strategy

0.97

Correlation Coefficient

Dow Jones  Moderate Strategy

Almost no diversification

The 3 months correlation between Dow and Moderate is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and Moderate Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Strategy 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 Moderate Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Strategy has no effect on the direction of Dow Jones i.e., Dow Jones and Moderate Strategy go up and down completely randomly.

Pair Corralation between Dow Jones and Moderate Strategy

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 2.37 times more return on investment than Moderate Strategy. However, Dow Jones is 2.37 times more volatile than Moderate Strategy Fund. It trades about 0.16 of its potential returns per unit of risk. Moderate Strategy Fund is currently generating about 0.24 per unit of risk. If you would invest  4,131,743  in Dow Jones Industrial on May 2, 2025 and sell it today you would earn a total of  314,385  from holding Dow Jones Industrial or generate 7.61% return on investment over 90 days.

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

Dow Jones Industrial  vs.  Moderate Strategy Fund

Pair Trading with Dow Jones and Moderate Strategy

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

The idea behind Dow Jones Industrial and Moderate Strategy Fund 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..