Correlation Between Norsk Hydro and Magna International

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

Diversification Opportunities for Norsk Hydro and Magna International

0.33

Correlation Coefficient

Norsk Hydro  Magna International

Weak diversification

The 3 months correlation between Norsk and Magna is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Magna International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Magna International 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 Magna International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Magna International has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Magna International go up and down completely randomly.

Pair Corralation between Norsk Hydro and Magna International

Assuming the 90 days trading horizon Norsk Hydro ASA is expected to under-perform the Magna International. But the stock apears to be less risky and, when comparing its historical volatility, Norsk Hydro ASA is 1.8 times less risky than Magna International. The stock trades about -0.56 of its potential returns per unit of risk. The Magna International is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  4,116  in Magna International on September 20, 2024 and sell it today you would earn a total of  49.00  from holding Magna International or generate 1.19% return on investment over 90 days.

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

Norsk Hydro ASA  vs.  Magna International

Norsk Hydro ASA

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Norsk Hydro ASA are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.

Magna International

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Magna International are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Magna International reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norsk Hydro and Magna International

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

The idea behind Norsk Hydro ASA and Magna International 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .