Correlation Between FIRE Funds and Northern Lights

Can any of the company-specific risk be diversified away by investing in both FIRE Funds and Northern Lights 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 FIRE Funds and Northern Lights into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between FIRE Funds Wealth and Northern Lights, you can compare the effects of market volatilities on FIRE Funds and Northern Lights 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 FIRE Funds with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of FIRE Funds and Northern Lights.

Diversification Opportunities for FIRE Funds and Northern Lights

0.8

Correlation Coefficient

FIRE Funds  Northern Lights

Very poor diversification

The 3 months correlation between FIRE and Northern is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding FIRE Funds Wealth and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and FIRE Funds 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 FIRE Funds Wealth are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of FIRE Funds i.e., FIRE Funds and Northern Lights go up and down completely randomly.

Pair Corralation between FIRE Funds and Northern Lights

Given the investment horizon of 90 days FIRE Funds is expected to generate 6.12 times less return on investment than Northern Lights. But when comparing it to its historical volatility, FIRE Funds Wealth is 1.48 times less risky than Northern Lights. It trades about 0.03 of its potential returns per unit of risk. Northern Lights is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,597  in Northern Lights on December 1, 2024 and sell it today you would earn a total of  103.00  from holding Northern Lights or generate 3.97% return on investment over 90 days.

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

FIRE Funds Wealth  vs.  Northern Lights

FIRE Funds Wealth

Risk-Adjusted Performance

Very Weak

Over the last 90 days FIRE Funds Wealth has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, FIRE Funds is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Northern Lights

Risk-Adjusted Performance

Very Weak

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

Pair Trading with FIRE Funds and Northern Lights

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

The idea behind FIRE Funds Wealth and Northern Lights 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.