Correlation Between Linamar and Northland Power

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

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

Diversification Opportunities for Linamar and Northland Power

0.63

Correlation Coefficient

Linamar  Northland Power

Poor diversification

The 3 months correlation between Linamar and Northland is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Linamar and Northland Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northland Power and Linamar 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 Linamar 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 Linamar i.e., Linamar and Northland Power go up and down completely randomly.

Pair Corralation between Linamar and Northland Power

Assuming the 90 days trading horizon Linamar is expected to under-perform the Northland Power. But the stock apears to be less risky and, when comparing its historical volatility, Linamar is 1.15 times less risky than Northland Power. The stock trades about -0.13 of its potential returns per unit of risk. The Northland Power is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,999  in Northland Power on November 29, 2024 and sell it today you would lose (97.00) from holding Northland Power or give up 4.85% of portfolio value over 90 days.

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

Linamar  vs.  Northland Power

Linamar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Linamar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in March 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Northland Power

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northland Power has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Northland Power is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Linamar and Northland Power

The main advantage of trading using opposite Linamar and Northland Power positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Linamar 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 Linamar 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.