Correlation Between Norsk Hydro and Elanco Animal

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

Diversification Opportunities for Norsk Hydro and Elanco Animal

0.45

Correlation Coefficient

Norsk Hydro  Elanco Animal

Very weak diversification

The 3 months correlation between Norsk and Elanco is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Elanco Animal Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Elanco Animal Health 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 Elanco Animal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Elanco Animal Health has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Elanco Animal go up and down completely randomly.

Pair Corralation between Norsk Hydro and Elanco Animal

Assuming the 90 days trading horizon Norsk Hydro ASA is expected to under-perform the Elanco Animal. But the stock apears to be less risky and, when comparing its historical volatility, Norsk Hydro ASA is 1.27 times less risky than Elanco Animal. The stock trades about -0.34 of its potential returns per unit of risk. The Elanco Animal Health is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  1,206  in Elanco Animal Health on October 8, 2024 and sell it today you would lose (41.00) from holding Elanco Animal Health or give up 3.4% of portfolio value over 90 days.

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

Norsk Hydro ASA  vs.  Elanco Animal Health

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 nearly stable technical indicators, Norsk Hydro is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Elanco Animal Health

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Elanco Animal Health has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Norsk Hydro and Elanco Animal

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

The idea behind Norsk Hydro ASA and Elanco Animal Health 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.