Correlation Between Associated British and Norsk Hydro

Can any of the company-specific risk be diversified away by investing in both Associated British and Norsk Hydro 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 Associated British and Norsk Hydro into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Associated British Foods and Norsk Hydro ASA, you can compare the effects of market volatilities on Associated British and Norsk Hydro 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 Associated British with a short position of Norsk Hydro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Associated British and Norsk Hydro.

Diversification Opportunities for Associated British and Norsk Hydro

0.47

Correlation Coefficient

Associated British  Norsk Hydro

Very weak diversification

The 3 months correlation between Associated and Norsk is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Associated British Foods and Norsk Hydro ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norsk Hydro ASA and Associated British 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 Associated British Foods are associated (or correlated) with Norsk Hydro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norsk Hydro ASA has no effect on the direction of Associated British i.e., Associated British and Norsk Hydro go up and down completely randomly.

Pair Corralation between Associated British and Norsk Hydro

Assuming the 90 days trading horizon Associated British is expected to generate 1.72 times less return on investment than Norsk Hydro. But when comparing it to its historical volatility, Associated British Foods is 2.32 times less risky than Norsk Hydro. It trades about 0.04 of its potential returns per unit of risk. Norsk Hydro ASA is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  422.00  in Norsk Hydro ASA on October 7, 2024 and sell it today you would earn a total of  117.00  from holding Norsk Hydro ASA or generate 27.73% return on investment over 90 days.

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

Associated British Foods  vs.  Norsk Hydro ASA

Associated British Foods

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Associated British Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Norsk Hydro ASA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Norsk Hydro ASA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's technical indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Associated British and Norsk Hydro

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

The idea behind Associated British Foods and Norsk Hydro ASA 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.