Correlation Between NAPCO Security and Liberty Defense

Can any of the company-specific risk be diversified away by investing in both NAPCO Security and Liberty Defense 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 NAPCO Security and Liberty Defense into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between NAPCO Security Technologies and Liberty Defense Holdings, you can compare the effects of market volatilities on NAPCO Security and Liberty Defense 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 NAPCO Security with a short position of Liberty Defense. Check out your portfolio center. Please also check ongoing floating volatility patterns of NAPCO Security and Liberty Defense.

Diversification Opportunities for NAPCO Security and Liberty Defense

-0.83

Correlation Coefficient

NAPCO Security  Liberty Defense

Pay attention - limited upside

The 3 months correlation between NAPCO and Liberty is -0.83. Overlapping area represents the amount of risk that can be diversified away by holding NAPCO Security Technologies and Liberty Defense Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liberty Defense Holdings and NAPCO Security 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 NAPCO Security Technologies are associated (or correlated) with Liberty Defense. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liberty Defense Holdings has no effect on the direction of NAPCO Security i.e., NAPCO Security and Liberty Defense go up and down completely randomly.

Pair Corralation between NAPCO Security and Liberty Defense

Given the investment horizon of 90 days NAPCO Security is expected to generate 3.64 times less return on investment than Liberty Defense. But when comparing it to its historical volatility, NAPCO Security Technologies is 1.73 times less risky than Liberty Defense. It trades about 0.01 of its potential returns per unit of risk. Liberty Defense Holdings is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  141.00  in Liberty Defense Holdings on December 2, 2024 and sell it today you would lose (29.00) from holding Liberty Defense Holdings or give up 20.57% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	99.8%
Values	Daily Returns

NAPCO Security Technologies  vs.  Liberty Defense Holdings

NAPCO Security Techn

Risk-Adjusted Performance

Very Weak

Over the last 90 days NAPCO Security Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Liberty Defense Holdings

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Liberty Defense Holdings are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal technical and fundamental indicators, Liberty Defense reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NAPCO Security and Liberty Defense

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

The idea behind NAPCO Security Technologies and Liberty Defense Holdings 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.