Correlation Between Norfolk Southern and Union Pacific

Can any of the company-specific risk be diversified away by investing in both Norfolk Southern and Union Pacific 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 Norfolk Southern and Union Pacific into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Norfolk Southern and Union Pacific, you can compare the effects of market volatilities on Norfolk Southern and Union Pacific 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 Norfolk Southern with a short position of Union Pacific. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norfolk Southern and Union Pacific.

Diversification Opportunities for Norfolk Southern and Union Pacific

0.72

Correlation Coefficient

Norfolk Southern  Union Pacific

Poor diversification

The 3 months correlation between Norfolk and Union is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Norfolk Southern and Union Pacific in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Union Pacific and Norfolk Southern 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 Norfolk Southern are associated (or correlated) with Union Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Union Pacific has no effect on the direction of Norfolk Southern i.e., Norfolk Southern and Union Pacific go up and down completely randomly.

Pair Corralation between Norfolk Southern and Union Pacific

Assuming the 90 days horizon Norfolk Southern is expected to under-perform the Union Pacific. In addition to that, Norfolk Southern is 1.25 times more volatile than Union Pacific. It trades about -0.4 of its total potential returns per unit of risk. Union Pacific is currently generating about -0.19 per unit of volatility. If you would invest  22,747  in Union Pacific on September 23, 2024 and sell it today you would lose (1,037) from holding Union Pacific or give up 4.56% of portfolio value over 90 days.

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

Norfolk Southern  vs.  Union Pacific

Norfolk Southern

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Norfolk Southern are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Norfolk Southern is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Union Pacific

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Union Pacific has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Union Pacific is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Norfolk Southern and Union Pacific

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

The idea behind Norfolk Southern and Union Pacific 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.