Correlation Between Norsk Hydro and Yara International

Can any of the company-specific risk be diversified away by investing in both Norsk Hydro and Yara International 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 Yara International 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 Yara International ASA, you can compare the effects of market volatilities on Norsk Hydro and Yara International 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 Yara International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norsk Hydro and Yara International.

Diversification Opportunities for Norsk Hydro and Yara International

0.32

Correlation Coefficient

Norsk Hydro  Yara International

Weak diversification

The 3 months correlation between Norsk and Yara is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Yara International ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yara International ASA 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 Yara International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yara International ASA has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Yara International go up and down completely randomly.

Pair Corralation between Norsk Hydro and Yara International

Assuming the 90 days trading horizon Norsk Hydro ASA is expected to under-perform the Yara International. But the stock apears to be less risky and, when comparing its historical volatility, Norsk Hydro ASA is 1.19 times less risky than Yara International. The stock trades about -0.07 of its potential returns per unit of risk. The Yara International ASA is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  33,330  in Yara International ASA on November 20, 2024 and sell it today you would lose (610.00) from holding Yara International ASA or give up 1.83% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Norsk Hydro ASA  vs.  Yara International ASA

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.

Yara International ASA

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Yara International ASA are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, Yara International is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Norsk Hydro and Yara International

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

The idea behind Norsk Hydro ASA and Yara International ASA 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.