Correlation Between Northern Lights and IShares MSCI

Can any of the company-specific risk be diversified away by investing in both Northern Lights and IShares MSCI 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 MSCI 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 MSCI USA, you can compare the effects of market volatilities on Northern Lights and IShares MSCI 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 MSCI. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and IShares MSCI.

Diversification Opportunities for Northern Lights and IShares MSCI

0.94

Correlation Coefficient

Northern Lights  IShares MSCI

Almost no diversification

The 3 months correlation between Northern and IShares is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and iShares MSCI USA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI USA 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 MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI USA has no effect on the direction of Northern Lights i.e., Northern Lights and IShares MSCI go up and down completely randomly.

Pair Corralation between Northern Lights and IShares MSCI

Given the investment horizon of 90 days Northern Lights is expected to generate 1.09 times more return on investment than IShares MSCI. However, Northern Lights is 1.09 times more volatile than iShares MSCI USA. It trades about -0.06 of its potential returns per unit of risk. iShares MSCI USA is currently generating about -0.08 per unit of risk. If you would invest  3,460  in Northern Lights on December 30, 2024 and sell it today you would lose (132.00) from holding Northern Lights or give up 3.82% of portfolio value over 90 days.

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

Northern Lights  vs.  iShares MSCI USA

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.

iShares MSCI USA

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares MSCI USA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Northern Lights and IShares MSCI

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

The idea behind Northern Lights and iShares MSCI USA 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.