Correlation Between Norfolk Southern and PSI All

Can any of the company-specific risk be diversified away by investing in both Norfolk Southern and PSI All 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 Norfolk Southern and PSI All into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Norfolk Southern and PSI All Share, you can compare the effects of market volatilities on Norfolk Southern and PSI All 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 Norfolk Southern with a short position of PSI All. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norfolk Southern and PSI All.

Diversification Opportunities for Norfolk Southern and PSI All

0.29

Correlation Coefficient

Norfolk Southern  PSI All

Modest diversification

The 3 months correlation between Norfolk and PSI is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Norfolk Southern and PSI All Share in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PSI All Share and Norfolk Southern 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 Norfolk Southern are associated (or correlated) with PSI All. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PSI All Share has no effect on the direction of Norfolk Southern i.e., Norfolk Southern and PSI All go up and down completely randomly.

Pair Corralation between Norfolk Southern and PSI All

Considering the 90-day investment horizon Norfolk Southern is expected to under-perform the PSI All. In addition to that, Norfolk Southern is 1.81 times more volatile than PSI All Share. It trades about -0.14 of its total potential returns per unit of risk. PSI All Share is currently generating about -0.1 per unit of volatility. If you would invest  427,645  in PSI All Share on October 26, 2024 and sell it today you would lose (12,382) from holding PSI All Share or give up 2.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.12%
Values	Daily Returns

Norfolk Southern  vs.  PSI All Share

Pair Trading with Norfolk Southern and PSI All

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

The idea behind Norfolk Southern and PSI All Share 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.