Correlation Between Northern Lights and ProShares Russell

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

By analyzing existing cross correlation between Northern Lights and ProShares Russell 2000, you can compare the effects of market volatilities on Northern Lights and ProShares Russell 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 ProShares Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and ProShares Russell.

Diversification Opportunities for Northern Lights and ProShares Russell

0.83

Correlation Coefficient

Northern Lights  ProShares Russell

Very poor diversification

The 3 months correlation between Northern and ProShares is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and ProShares Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares Russell 2000 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 ProShares Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares Russell 2000 has no effect on the direction of Northern Lights i.e., Northern Lights and ProShares Russell go up and down completely randomly.

Pair Corralation between Northern Lights and ProShares Russell

Given the investment horizon of 90 days Northern Lights is expected to generate 0.65 times more return on investment than ProShares Russell. However, Northern Lights is 1.55 times less risky than ProShares Russell. It trades about 0.11 of its potential returns per unit of risk. ProShares Russell 2000 is currently generating about 0.05 per unit of risk. If you would invest  2,362  in Northern Lights on September 5, 2024 and sell it today you would earn a total of  1,244  from holding Northern Lights or generate 52.67% return on investment over 90 days.

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

Northern Lights  vs.  ProShares Russell 2000

Northern Lights

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 15 (%) 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.

ProShares Russell 2000

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ProShares Russell 2000 are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting fundamental indicators, ProShares Russell may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Northern Lights and ProShares Russell

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

The idea behind Northern Lights and ProShares Russell 2000 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.