Correlation Between North West and Loblaw Companies

Can any of the company-specific risk be diversified away by investing in both North West and Loblaw Companies 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 North West and Loblaw Companies into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between North West and Loblaw Companies Limited, you can compare the effects of market volatilities on North West and Loblaw Companies 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 North West with a short position of Loblaw Companies. Check out your portfolio center. Please also check ongoing floating volatility patterns of North West and Loblaw Companies.

Diversification Opportunities for North West and Loblaw Companies

0.62

Correlation Coefficient

North West  Loblaw Companies

Poor diversification

The 3 months correlation between North and Loblaw is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding North West and Loblaw Companies Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Loblaw Companies and North West 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 North West are associated (or correlated) with Loblaw Companies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Loblaw Companies has no effect on the direction of North West i.e., North West and Loblaw Companies go up and down completely randomly.

Pair Corralation between North West and Loblaw Companies

Assuming the 90 days trading horizon North West is expected to generate 1.32 times more return on investment than Loblaw Companies. However, North West is 1.32 times more volatile than Loblaw Companies Limited. It trades about 0.15 of its potential returns per unit of risk. Loblaw Companies Limited is currently generating about 0.06 per unit of risk. If you would invest  4,532  in North West on August 31, 2024 and sell it today you would earn a total of  623.00  from holding North West or generate 13.75% return on investment over 90 days.

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

North West  vs.  Loblaw Companies Limited

North West

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in North West are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain fundamental indicators, North West displayed solid returns over the last few months and may actually be approaching a breakup point.

Loblaw Companies

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Loblaw Companies Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Loblaw Companies is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with North West and Loblaw Companies

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

The idea behind North West and Loblaw Companies 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.