Correlation Between Northrop Grumman and General Dynamics

Can any of the company-specific risk be diversified away by investing in both Northrop Grumman and General Dynamics 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 Northrop Grumman and General Dynamics into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Northrop Grumman and General Dynamics

0.82

Correlation Coefficient

Northrop Grumman  General Dynamics

Very poor diversification

The 3 months correlation between Northrop and General is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Northrop Grumman and General Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Dynamics and Northrop Grumman 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 Northrop Grumman are associated (or correlated) with General Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Dynamics has no effect on the direction of Northrop Grumman i.e., Northrop Grumman and General Dynamics go up and down completely randomly.

Pair Corralation between Northrop Grumman and General Dynamics

Considering the 90-day investment horizon Northrop Grumman is expected to generate 1.22 times more return on investment than General Dynamics. However, Northrop Grumman is 1.22 times more volatile than General Dynamics. It trades about 0.1 of its potential returns per unit of risk. General Dynamics is currently generating about 0.04 per unit of risk. If you would invest  46,444  in Northrop Grumman on December 28, 2024 and sell it today you would earn a total of  4,775  from holding Northrop Grumman or generate 10.28% return on investment over 90 days.

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

Northrop Grumman  vs.  General Dynamics

Northrop Grumman

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northrop Grumman are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Northrop Grumman may actually be approaching a critical reversion point that can send shares even higher in April 2025.

General Dynamics

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in General Dynamics are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, General Dynamics is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Northrop Grumman and General Dynamics

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

The idea behind Northrop Grumman and General Dynamics 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.