Correlation Between Northern Lights and ALABAMA TAX

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

By analyzing existing cross correlation between Northern Lights and ALABAMA TAX FREE BOND, you can compare the effects of market volatilities on Northern Lights and ALABAMA TAX 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 ALABAMA TAX. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and ALABAMA TAX.

Diversification Opportunities for Northern Lights and ALABAMA TAX

0.77

Correlation Coefficient

Northern Lights  ALABAMA TAX

Poor diversification

The 3 months correlation between Northern and ALABAMA is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and ALABAMA TAX FREE BOND in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ALABAMA TAX FREE 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 ALABAMA TAX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ALABAMA TAX FREE has no effect on the direction of Northern Lights i.e., Northern Lights and ALABAMA TAX go up and down completely randomly.

Pair Corralation between Northern Lights and ALABAMA TAX

Given the investment horizon of 90 days Northern Lights is expected to under-perform the ALABAMA TAX. In addition to that, Northern Lights is 1.55 times more volatile than ALABAMA TAX FREE BOND. It trades about -0.06 of its total potential returns per unit of risk. ALABAMA TAX FREE BOND is currently generating about -0.05 per unit of volatility. If you would invest  1,221  in ALABAMA TAX FREE BOND on December 30, 2024 and sell it today you would lose (27.00) from holding ALABAMA TAX FREE BOND or give up 2.21% of portfolio value over 90 days.

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

Northern Lights  vs.  ALABAMA TAX FREE BOND

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 rather sound fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

ALABAMA TAX FREE

Risk-Adjusted Performance

Very Weak

Over the last 90 days ALABAMA TAX FREE BOND has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, ALABAMA TAX 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 ALABAMA TAX

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

The idea behind Northern Lights and ALABAMA TAX FREE BOND 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.