Correlation Between Norsk Hydro and Reach Subsea

Can any of the company-specific risk be diversified away by investing in both Norsk Hydro and Reach Subsea 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 Norsk Hydro and Reach Subsea into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Norsk Hydro ASA and Reach Subsea, you can compare the effects of market volatilities on Norsk Hydro and Reach Subsea 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 Norsk Hydro with a short position of Reach Subsea. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norsk Hydro and Reach Subsea.

Diversification Opportunities for Norsk Hydro and Reach Subsea

-0.16

Correlation Coefficient

Norsk Hydro  Reach Subsea

Good diversification

The 3 months correlation between Norsk and Reach is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Reach Subsea in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reach Subsea and Norsk Hydro 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 Norsk Hydro ASA are associated (or correlated) with Reach Subsea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reach Subsea has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Reach Subsea go up and down completely randomly.

Pair Corralation between Norsk Hydro and Reach Subsea

Assuming the 90 days trading horizon Norsk Hydro ASA is expected to generate 0.83 times more return on investment than Reach Subsea. However, Norsk Hydro ASA is 1.21 times less risky than Reach Subsea. It trades about 0.0 of its potential returns per unit of risk. Reach Subsea is currently generating about -0.03 per unit of risk. If you would invest  6,254  in Norsk Hydro ASA on December 30, 2024 and sell it today you would lose (88.00) from holding Norsk Hydro ASA or give up 1.41% of portfolio value over 90 days.

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

Norsk Hydro ASA  vs.  Reach Subsea

Norsk Hydro ASA

Risk-Adjusted Performance

Very Weak

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

Reach Subsea

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reach Subsea has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Reach Subsea is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Norsk Hydro and Reach Subsea

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

The idea behind Norsk Hydro ASA and Reach Subsea 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.