Correlation Between Norsk Hydro and Sumitomo Rubber

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

Diversification Opportunities for Norsk Hydro and Sumitomo Rubber

-0.17

Correlation Coefficient

Norsk Hydro  Sumitomo Rubber

Good diversification

The 3 months correlation between Norsk and Sumitomo is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Sumitomo Rubber Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Rubber Indu 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 Sumitomo Rubber. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Rubber Indu has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Sumitomo Rubber go up and down completely randomly.

Pair Corralation between Norsk Hydro and Sumitomo Rubber

Assuming the 90 days trading horizon Norsk Hydro is expected to generate 3.47 times less return on investment than Sumitomo Rubber. But when comparing it to its historical volatility, Norsk Hydro ASA is 1.72 times less risky than Sumitomo Rubber. It trades about 0.03 of its potential returns per unit of risk. Sumitomo Rubber Industries is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  344.00  in Sumitomo Rubber Industries on October 5, 2024 and sell it today you would earn a total of  726.00  from holding Sumitomo Rubber Industries or generate 211.05% return on investment over 90 days.

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

Norsk Hydro ASA  vs.  Sumitomo Rubber Industries

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. Despite latest fragile performance, the Stock's technical indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Sumitomo Rubber Indu

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Sumitomo Rubber Industries has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly uncertain basic indicators, Sumitomo Rubber reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norsk Hydro and Sumitomo Rubber

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

The idea behind Norsk Hydro ASA and Sumitomo Rubber Industries 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.