Correlation Between Northern Lights and Ned Davis

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

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

Diversification Opportunities for Northern Lights and Ned Davis

0.81

Correlation Coefficient

Northern Lights  Ned Davis

Very poor diversification

The 3 months correlation between Northern and Ned is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Ned Davis Research in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ned Davis Research and Northern Lights 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 Northern Lights are associated (or correlated) with Ned Davis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ned Davis Research has no effect on the direction of Northern Lights i.e., Northern Lights and Ned Davis go up and down completely randomly.

Pair Corralation between Northern Lights and Ned Davis

Considering the 90-day investment horizon Northern Lights is expected to under-perform the Ned Davis. In addition to that, Northern Lights is 1.57 times more volatile than Ned Davis Research. It trades about -0.09 of its total potential returns per unit of risk. Ned Davis Research is currently generating about 0.01 per unit of volatility. If you would invest  1,970  in Ned Davis Research on December 20, 2024 and sell it today you would earn a total of  2.00  from holding Ned Davis Research or generate 0.1% return on investment over 90 days.

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

Northern Lights  vs.  Ned Davis Research

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 very healthy technical and fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Ned Davis Research

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ned Davis Research has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Ned Davis is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Northern Lights and Ned Davis

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

The idea behind Northern Lights and Ned Davis Research 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.