Correlation Between Northern Lights and Davis Select

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

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

Diversification Opportunities for Northern Lights and Davis Select

0.55

Correlation Coefficient

Northern Lights  Davis Select

Very weak diversification

The 3 months correlation between Northern and Davis is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Davis Select International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Select Interna 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 Davis Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Select Interna has no effect on the direction of Northern Lights i.e., Northern Lights and Davis Select go up and down completely randomly.

Pair Corralation between Northern Lights and Davis Select

Given the investment horizon of 90 days Northern Lights is expected to generate 1.8 times less return on investment than Davis Select. But when comparing it to its historical volatility, Northern Lights is 2.71 times less risky than Davis Select. It trades about 0.18 of its potential returns per unit of risk. Davis Select International is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,072  in Davis Select International on September 2, 2024 and sell it today you would earn a total of  279.00  from holding Davis Select International or generate 13.47% return on investment over 90 days.

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

Northern Lights  vs.  Davis Select International

Northern Lights

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental indicators, Northern Lights may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Davis Select Interna

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Select International are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Davis Select unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Northern Lights and Davis Select

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

The idea behind Northern Lights and Davis Select International 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.