Correlation Between Nasdaq-100(r) and Dow Jones

Can any of the company-specific risk be diversified away by investing in both Nasdaq-100(r) and Dow Jones 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 Nasdaq-100(r) and Dow Jones into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 2x Strategy and Dow Jones Industrial, you can compare the effects of market volatilities on Nasdaq-100(r) and Dow Jones 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 Nasdaq-100(r) with a short position of Dow Jones. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq-100(r) and Dow Jones.

Diversification Opportunities for Nasdaq-100(r) and Dow Jones

0.65

Correlation Coefficient

Nasdaq-100(r)  Dow Jones

Poor diversification

The 3 months correlation between Nasdaq-100(r) and Dow is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 2x Strategy and Dow Jones Industrial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dow Jones Industrial and Nasdaq-100(r) 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 Nasdaq 100 2x Strategy are associated (or correlated) with Dow Jones. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dow Jones Industrial has no effect on the direction of Nasdaq-100(r) i.e., Nasdaq-100(r) and Dow Jones go up and down completely randomly.

Pair Corralation between Nasdaq-100(r) and Dow Jones

Assuming the 90 days horizon Nasdaq 100 2x Strategy is expected to generate 2.52 times more return on investment than Dow Jones. However, Nasdaq-100(r) is 2.52 times more volatile than Dow Jones Industrial. It trades about 0.19 of its potential returns per unit of risk. Dow Jones Industrial is currently generating about 0.16 per unit of risk. If you would invest  36,628  in Nasdaq 100 2x Strategy on August 15, 2024 and sell it today you would earn a total of  5,835  from holding Nasdaq 100 2x Strategy or generate 15.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.67%
Values	Daily Returns

Nasdaq 100 2x Strategy  vs.  Dow Jones Industrial

Nasdaq 100 2x

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq 100 2x Strategy are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Nasdaq-100(r) showed solid returns over the last few months and may actually be approaching a breakup point.

Dow Jones Industrial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Dow Jones Industrial are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical indicators, Dow Jones may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Nasdaq-100(r) and Dow Jones

The main advantage of trading using opposite Nasdaq-100(r) and Dow Jones positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq-100(r) position performs unexpectedly, Dow Jones 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 Dow Jones will offset losses from the drop in Dow Jones' long position.

The idea behind Nasdaq 100 2x Strategy and Dow Jones Industrial 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.