Correlation Between Lockheed Martin and Northrop Grumman

Can any of the company-specific risk be diversified away by investing in both Lockheed Martin and Northrop Grumman 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 Lockheed Martin and Northrop Grumman into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Lockheed Martin and Northrop Grumman

0.52

Correlation Coefficient

Lockheed Martin  Northrop Grumman

Very weak diversification

The 3 months correlation between Lockheed and Northrop is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Lockheed Martin and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman and Lockheed Martin 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 Lockheed Martin are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of Lockheed Martin i.e., Lockheed Martin and Northrop Grumman go up and down completely randomly.

Pair Corralation between Lockheed Martin and Northrop Grumman

Assuming the 90 days trading horizon Lockheed Martin is expected to under-perform the Northrop Grumman. But the stock apears to be less risky and, when comparing its historical volatility, Lockheed Martin is 1.37 times less risky than Northrop Grumman. The stock trades about 0.0 of its potential returns per unit of risk. The Northrop Grumman is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  55,508  in Northrop Grumman on September 27, 2024 and sell it today you would earn a total of  1,663  from holding Northrop Grumman or generate 3.0% return on investment over 90 days.

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

Lockheed Martin  vs.  Northrop Grumman

Lockheed Martin

Risk-Adjusted Performance

0 of 100

Very Weak

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

Northrop Grumman

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Lockheed Martin and Northrop Grumman

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

The idea behind Lockheed Martin and Northrop Grumman 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.