Can any of the company-specific risk be diversified away by investing in both Dow Jones and Consolidated Edison 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 Consolidated Edison into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dow Jones Toys and Consolidated Edison, you can compare the effects of market volatilities on Dow Jones and Consolidated Edison 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 Consolidated Edison. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and Consolidated Edison.
Diversification Opportunities for Dow Jones and Consolidated Edison
The 3 months correlation between Dow and Consolidated is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Toys and Consolidated Edison in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consolidated Edison 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 Toys are associated (or correlated) with Consolidated Edison. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consolidated Edison has no effect on the direction of Dow Jones i.e., Dow Jones and Consolidated Edison go up and down completely randomly.
Pair Corralation between Dow Jones and Consolidated Edison
Assuming the 90 days horizon Dow Jones Toys is expected to generate 1.21 times more return on investment than Consolidated Edison. However, Dow Jones is 1.21 times more volatile than Consolidated Edison. It trades about 0.03 of its potential returns per unit of risk. Consolidated Edison is currently generating about 0.03 per unit of risk. If you would invest 2,131 in Dow Jones Toys on March 6, 2024 and sell it today you would earn a total of 308.07 from holding Dow Jones Toys or generate 14.46% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Dow Jones Toys are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Dow Jones may actually be approaching a critical reversion point that can send shares even higher in July 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in Consolidated Edison are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Consolidated Edison is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.