Correlation Between Lake Resources and Northern Star

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

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

Diversification Opportunities for Lake Resources and Northern Star

0.6

Correlation Coefficient

Lake Resources  Northern Star

Poor diversification

The 3 months correlation between Lake and Northern is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Lake Resources NL and Northern Star Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Star Resources and Lake Resources 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 Lake Resources NL are associated (or correlated) with Northern Star. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Star Resources has no effect on the direction of Lake Resources i.e., Lake Resources and Northern Star go up and down completely randomly.

Pair Corralation between Lake Resources and Northern Star

Assuming the 90 days trading horizon Lake Resources NL is expected to generate 2.05 times more return on investment than Northern Star. However, Lake Resources is 2.05 times more volatile than Northern Star Resources. It trades about -0.03 of its potential returns per unit of risk. Northern Star Resources is currently generating about -0.15 per unit of risk. If you would invest  4.20  in Lake Resources NL on October 10, 2024 and sell it today you would lose (0.10) from holding Lake Resources NL or give up 2.38% of portfolio value over 90 days.

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

Lake Resources NL  vs.  Northern Star Resources

Lake Resources NL

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Lake Resources NL has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Lake Resources is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Northern Star Resources

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Lake Resources and Northern Star

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

The idea behind Lake Resources NL and Northern Star Resources 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.