Correlation Between Northern Lights and IShares SP

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

By analyzing existing cross correlation between Northern Lights and iShares SP 500, you can compare the effects of market volatilities on Northern Lights and IShares SP 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 IShares SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and IShares SP.

Diversification Opportunities for Northern Lights and IShares SP

0.93

Correlation Coefficient

Northern Lights  IShares SP

Almost no diversification

The 3 months correlation between Northern and IShares is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and iShares SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SP 500 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 IShares SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SP 500 has no effect on the direction of Northern Lights i.e., Northern Lights and IShares SP go up and down completely randomly.

Pair Corralation between Northern Lights and IShares SP

Given the investment horizon of 90 days Northern Lights is expected to generate 1.54 times more return on investment than IShares SP. However, Northern Lights is 1.54 times more volatile than iShares SP 500. It trades about 0.18 of its potential returns per unit of risk. iShares SP 500 is currently generating about 0.24 per unit of risk. If you would invest  3,338  in Northern Lights on September 2, 2024 and sell it today you would earn a total of  257.00  from holding Northern Lights or generate 7.7% return on investment over 90 days.

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

Northern Lights  vs.  iShares SP 500

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.

iShares SP 500

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SP 500 are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, IShares SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Northern Lights and IShares SP

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

The idea behind Northern Lights and iShares SP 500 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.