Correlation Between Canadian Utilities and National Bank

Can any of the company-specific risk be diversified away by investing in both Canadian Utilities and National Bank 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 Canadian Utilities and National Bank into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Canadian Utilities Limited and National Bank Holdings, you can compare the effects of market volatilities on Canadian Utilities and National Bank 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 Canadian Utilities with a short position of National Bank. Check out your portfolio center. Please also check ongoing floating volatility patterns of Canadian Utilities and National Bank.

Diversification Opportunities for Canadian Utilities and National Bank

0.35

Correlation Coefficient

Canadian Utilities  National Bank

Weak diversification

The 3 months correlation between Canadian and National is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Utilities Limited and National Bank Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Bank Holdings and Canadian Utilities 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 Canadian Utilities Limited are associated (or correlated) with National Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Bank Holdings has no effect on the direction of Canadian Utilities i.e., Canadian Utilities and National Bank go up and down completely randomly.

Pair Corralation between Canadian Utilities and National Bank

Assuming the 90 days horizon Canadian Utilities is expected to generate 4.96 times less return on investment than National Bank. But when comparing it to its historical volatility, Canadian Utilities Limited is 2.75 times less risky than National Bank. It trades about 0.05 of its potential returns per unit of risk. National Bank Holdings is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  4,060  in National Bank Holdings on October 23, 2024 and sell it today you would earn a total of  120.00  from holding National Bank Holdings or generate 2.96% return on investment over 90 days.

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

Canadian Utilities Limited  vs.  National Bank Holdings

Canadian Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Canadian Utilities Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Canadian Utilities is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

National Bank Holdings

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in National Bank Holdings are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, National Bank reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Canadian Utilities and National Bank

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

The idea behind Canadian Utilities Limited and National Bank Holdings 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.