Correlation Between Norsk Hydro and Aluminum

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

Diversification Opportunities for Norsk Hydro and Aluminum

0.85

Correlation Coefficient

Norsk Hydro  Aluminum

Very poor diversification

The 3 months correlation between Norsk and Aluminum is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Aluminum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aluminum 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 Aluminum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aluminum has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Aluminum go up and down completely randomly.

Pair Corralation between Norsk Hydro and Aluminum

Assuming the 90 days horizon Norsk Hydro is expected to generate 1.99 times less return on investment than Aluminum. But when comparing it to its historical volatility, Norsk Hydro ASA is 1.99 times less risky than Aluminum. It trades about 0.16 of its potential returns per unit of risk. Aluminum is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1,000.00  in Aluminum on September 5, 2024 and sell it today you would earn a total of  255.00  from holding Aluminum or generate 25.5% return on investment over 90 days.

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

Norsk Hydro ASA  vs.  Aluminum

Norsk Hydro ASA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Norsk Hydro ASA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, Norsk Hydro is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Aluminum

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Aluminum has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical indicators, Aluminum is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Norsk Hydro and Aluminum

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

The idea behind Norsk Hydro ASA and Aluminum 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.