Correlation Between Northern Lights and SPDR SP

Can any of the company-specific risk be diversified away by investing in both Northern Lights and SPDR 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 SPDR 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 SPDR SP 500, you can compare the effects of market volatilities on Northern Lights and SPDR 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 SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and SPDR SP.

Diversification Opportunities for Northern Lights and SPDR SP

0.78

Correlation Coefficient

Northern Lights  SPDR SP

Poor diversification

The 3 months correlation between Northern and SPDR is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and SPDR SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR 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 SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP 500 has no effect on the direction of Northern Lights i.e., Northern Lights and SPDR SP go up and down completely randomly.

Pair Corralation between Northern Lights and SPDR SP

Given the investment horizon of 90 days Northern Lights is expected to generate 1.01 times more return on investment than SPDR SP. However, Northern Lights is 1.01 times more volatile than SPDR SP 500. It trades about -0.06 of its potential returns per unit of risk. SPDR SP 500 is currently generating about -0.08 per unit of risk. If you would invest  3,461  in Northern Lights on December 28, 2024 and sell it today you would lose (133.00) from holding Northern Lights or give up 3.84% 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.  SPDR SP 500

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.

SPDR SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, SPDR SP 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 SPDR SP

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

The idea behind Northern Lights and SPDR 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.