Correlation Between Ned Davis and Northern Lights

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

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

Diversification Opportunities for Ned Davis and Northern Lights

0.81

Correlation Coefficient

Ned Davis  Northern Lights

Very poor diversification

The 3 months correlation between Ned and Northern is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Ned Davis Research and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Ned Davis 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 Ned Davis Research are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Ned Davis i.e., Ned Davis and Northern Lights go up and down completely randomly.

Pair Corralation between Ned Davis and Northern Lights

Given the investment horizon of 90 days Ned Davis Research is expected to generate 0.64 times more return on investment than Northern Lights. However, Ned Davis Research is 1.57 times less risky than Northern Lights. It trades about 0.01 of its potential returns per unit of risk. Northern Lights is currently generating about -0.09 per unit of risk. If you would invest  1,970  in Ned Davis Research on December 20, 2024 and sell it today you would earn a total of  2.00  from holding Ned Davis Research or generate 0.1% return on investment over 90 days.

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

Ned Davis Research  vs.  Northern Lights

Ned Davis Research

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ned Davis Research has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Ned Davis is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 very healthy technical and fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Ned Davis and Northern Lights

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

The idea behind Ned Davis Research and Northern Lights 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.