Correlation Between DAX Index and Northland Power

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

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

Diversification Opportunities for DAX Index and Northland Power

-0.59

Correlation Coefficient

DAX Index  Northland Power

Excellent diversification

The 3 months correlation between DAX and Northland is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Northland Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northland Power and DAX Index 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 DAX Index 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 DAX Index i.e., DAX Index and Northland Power go up and down completely randomly.

Pair Corralation between DAX Index and Northland Power

Assuming the 90 days trading horizon DAX Index is expected to generate 0.3 times more return on investment than Northland Power. However, DAX Index is 3.32 times less risky than Northland Power. It trades about 0.26 of its potential returns per unit of risk. Northland Power is currently generating about -0.17 per unit of risk. If you would invest  1,914,617  in DAX Index on September 22, 2024 and sell it today you would earn a total of  73,858  from holding DAX Index or generate 3.86% return on investment over 90 days.

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

DAX Index  vs.  Northland Power

Pair Trading with DAX Index and Northland Power

The main advantage of trading using opposite DAX Index and Northland Power positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DAX Index 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 DAX Index 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.