Correlation Between North American and Newpark Resources

Can any of the company-specific risk be diversified away by investing in both North American and Newpark Resources 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 North American and Newpark Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between North American Construction and Newpark Resources, you can compare the effects of market volatilities on North American and Newpark Resources 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 North American with a short position of Newpark Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Newpark Resources.

Diversification Opportunities for North American and Newpark Resources

0.62

Correlation Coefficient

North American  Newpark Resources

Poor diversification

The 3 months correlation between North and Newpark is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Newpark Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Newpark Resources and North American 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 North American Construction are associated (or correlated) with Newpark Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Newpark Resources has no effect on the direction of North American i.e., North American and Newpark Resources go up and down completely randomly.

Pair Corralation between North American and Newpark Resources

Considering the 90-day investment horizon North American is expected to generate 1.2 times less return on investment than Newpark Resources. But when comparing it to its historical volatility, North American Construction is 1.08 times less risky than Newpark Resources. It trades about 0.05 of its potential returns per unit of risk. Newpark Resources is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  411.00  in Newpark Resources on September 19, 2024 and sell it today you would earn a total of  314.00  from holding Newpark Resources or generate 76.4% return on investment over 90 days.

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

North American Construction  vs.  Newpark Resources

North American Const

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, North American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Newpark Resources

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Newpark Resources has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Newpark Resources is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with North American and Newpark Resources

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

The idea behind North American Construction and Newpark Resources 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.