Correlation Between BAE Systems and Northrop Grumman

Can any of the company-specific risk be diversified away by investing in both BAE Systems and Northrop Grumman 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 BAE Systems and Northrop Grumman into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BAE Systems PLC and Northrop Grumman, you can compare the effects of market volatilities on BAE Systems and Northrop Grumman 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 BAE Systems with a short position of Northrop Grumman. Check out your portfolio center. Please also check ongoing floating volatility patterns of BAE Systems and Northrop Grumman.

Diversification Opportunities for BAE Systems and Northrop Grumman

0.44

Correlation Coefficient

BAE Systems  Northrop Grumman

Very weak diversification

The 3 months correlation between BAE and Northrop is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman and BAE Systems 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 BAE Systems PLC are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of BAE Systems i.e., BAE Systems and Northrop Grumman go up and down completely randomly.

Pair Corralation between BAE Systems and Northrop Grumman

Assuming the 90 days horizon BAE Systems PLC is expected to under-perform the Northrop Grumman. In addition to that, BAE Systems is 1.61 times more volatile than Northrop Grumman. It trades about -0.07 of its total potential returns per unit of risk. Northrop Grumman is currently generating about -0.09 per unit of volatility. If you would invest  52,269  in Northrop Grumman on September 3, 2024 and sell it today you would lose (3,304) from holding Northrop Grumman or give up 6.32% of portfolio value over 90 days.

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

BAE Systems PLC  vs.  Northrop Grumman

BAE Systems PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Northrop Grumman

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northrop Grumman has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Northrop Grumman is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with BAE Systems and Northrop Grumman

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

The idea behind BAE Systems PLC and Northrop Grumman 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.