Correlation Between Norsk Hydro and PSI Software

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

Diversification Opportunities for Norsk Hydro and PSI Software

0.63

Correlation Coefficient

Norsk Hydro  PSI Software

Poor diversification

The 3 months correlation between Norsk and PSI is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and PSI Software AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSI Software AG 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 PSI Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSI Software AG has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and PSI Software go up and down completely randomly.

Pair Corralation between Norsk Hydro and PSI Software

Assuming the 90 days trading horizon Norsk Hydro is expected to generate 4.24 times less return on investment than PSI Software. But when comparing it to its historical volatility, Norsk Hydro ASA is 1.56 times less risky than PSI Software. It trades about 0.04 of its potential returns per unit of risk. PSI Software AG is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,110  in PSI Software AG on December 29, 2024 and sell it today you would earn a total of  490.00  from holding PSI Software AG or generate 23.22% 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.  PSI Software AG

Norsk Hydro ASA

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Norsk Hydro ASA are ranked lower than 3 (%) 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 latest stock price disturbance, may contribute to mid-run losses for the stockholders.

PSI Software AG

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in PSI Software AG are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, PSI Software exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norsk Hydro and PSI Software

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

The idea behind Norsk Hydro ASA and PSI Software AG 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.