Correlation Between North American and DIRTT Environmental

Can any of the company-specific risk be diversified away by investing in both North American and DIRTT Environmental 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 North American and DIRTT Environmental into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between North American Financial and DIRTT Environmental Solutions, you can compare the effects of market volatilities on North American and DIRTT Environmental 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 North American with a short position of DIRTT Environmental. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and DIRTT Environmental.

Diversification Opportunities for North American and DIRTT Environmental

0.77

Correlation Coefficient

North American  DIRTT Environmental

Poor diversification

The 3 months correlation between North and DIRTT is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding North American Financial and DIRTT Environmental Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIRTT Environmental and North American 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 North American Financial are associated (or correlated) with DIRTT Environmental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DIRTT Environmental has no effect on the direction of North American i.e., North American and DIRTT Environmental go up and down completely randomly.

Pair Corralation between North American and DIRTT Environmental

Assuming the 90 days trading horizon North American is expected to generate 2.34 times less return on investment than DIRTT Environmental. But when comparing it to its historical volatility, North American Financial is 2.95 times less risky than DIRTT Environmental. It trades about 0.2 of its potential returns per unit of risk. DIRTT Environmental Solutions is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  67.00  in DIRTT Environmental Solutions on October 5, 2024 and sell it today you would earn a total of  34.00  from holding DIRTT Environmental Solutions or generate 50.75% return on investment over 90 days.

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

North American Financial  vs.  DIRTT Environmental Solutions

North American Financial

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in North American Financial are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal basic indicators, North American displayed solid returns over the last few months and may actually be approaching a breakup point.

DIRTT Environmental

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in DIRTT Environmental Solutions are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, DIRTT Environmental displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North American and DIRTT Environmental

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

The idea behind North American Financial and DIRTT Environmental Solutions 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.

Check out your portfolio center.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.