Correlation Between Northland Power and EDP Renovveis

Can any of the company-specific risk be diversified away by investing in both Northland Power and EDP Renovveis 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 Northland Power and EDP Renovveis into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northland Power and EDP Renovveis SA, you can compare the effects of market volatilities on Northland Power and EDP Renovveis 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 Northland Power with a short position of EDP Renovveis. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northland Power and EDP Renovveis.

Diversification Opportunities for Northland Power and EDP Renovveis

0.88

Correlation Coefficient

Northland Power  EDP Renovveis

Very poor diversification

The 3 months correlation between Northland and EDP is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Northland Power and EDP Renovveis SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EDP Renovveis SA and Northland Power 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 Northland Power are associated (or correlated) with EDP Renovveis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EDP Renovveis SA has no effect on the direction of Northland Power i.e., Northland Power and EDP Renovveis go up and down completely randomly.

Pair Corralation between Northland Power and EDP Renovveis

Assuming the 90 days horizon Northland Power is expected to under-perform the EDP Renovveis. In addition to that, Northland Power is 1.45 times more volatile than EDP Renovveis SA. It trades about -0.37 of its total potential returns per unit of risk. EDP Renovveis SA is currently generating about -0.46 per unit of volatility. If you would invest  1,090  in EDP Renovveis SA on October 1, 2024 and sell it today you would lose (130.00) from holding EDP Renovveis SA or give up 11.93% of portfolio value over 90 days.

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

Northland Power  vs.  EDP Renovveis SA

Northland Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northland Power has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

EDP Renovveis SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days EDP Renovveis SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Northland Power and EDP Renovveis

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

The idea behind Northland Power and EDP Renovveis SA 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.