Correlation Between Applied Materials and Northland Power

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

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

Diversification Opportunities for Applied Materials and Northland Power

-0.48

Correlation Coefficient

Applied Materials  Northland Power

Very good diversification

The 3 months correlation between Applied and Northland is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and Northland Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northland Power and Applied Materials 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 Applied Materials are associated (or correlated) with Northland Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northland Power has no effect on the direction of Applied Materials i.e., Applied Materials and Northland Power go up and down completely randomly.

Pair Corralation between Applied Materials and Northland Power

Assuming the 90 days horizon Applied Materials is expected to under-perform the Northland Power. In addition to that, Applied Materials is 1.03 times more volatile than Northland Power. It trades about -0.05 of its total potential returns per unit of risk. Northland Power is currently generating about 0.03 per unit of volatility. If you would invest  1,224  in Northland Power on December 23, 2024 and sell it today you would earn a total of  31.00  from holding Northland Power or generate 2.53% return on investment over 90 days.

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

Applied Materials  vs.  Northland Power

Applied Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile 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.

Northland Power

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Northland Power are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Northland Power is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Applied Materials and Northland Power

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

The idea behind Applied Materials and Northland Power 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.