Correlation Between Norsk Hydro and Nufarm

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

Diversification Opportunities for Norsk Hydro and Nufarm

0.61

Correlation Coefficient

Norsk Hydro  Nufarm

Poor diversification

The 3 months correlation between Norsk and Nufarm is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Nufarm Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nufarm Limited 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 Nufarm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nufarm Limited has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Nufarm go up and down completely randomly.

Pair Corralation between Norsk Hydro and Nufarm

Assuming the 90 days trading horizon Norsk Hydro is expected to generate 1.05 times less return on investment than Nufarm. In addition to that, Norsk Hydro is 1.18 times more volatile than Nufarm Limited. It trades about 0.06 of its total potential returns per unit of risk. Nufarm Limited is currently generating about 0.07 per unit of volatility. If you would invest  212.00  in Nufarm Limited on December 2, 2024 and sell it today you would earn a total of  10.00  from holding Nufarm Limited or generate 4.72% return on investment over 90 days.

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

Norsk Hydro ASA  vs.  Nufarm Limited

Norsk Hydro ASA

Risk-Adjusted Performance

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 current stock price disturbance, may contribute to mid-run losses for the stockholders.

Nufarm Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nufarm Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Nufarm is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Norsk Hydro and Nufarm

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

The idea behind Norsk Hydro ASA and Nufarm Limited 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.