Correlation Between NorthWestern and Canadian Utilities

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

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

Diversification Opportunities for NorthWestern and Canadian Utilities

0.53

Correlation Coefficient

NorthWestern  Canadian Utilities

Very weak diversification

The 3 months correlation between NorthWestern and Canadian is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding NorthWestern and Canadian Utilities Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Utilities and NorthWestern 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 NorthWestern are associated (or correlated) with Canadian Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Utilities has no effect on the direction of NorthWestern i.e., NorthWestern and Canadian Utilities go up and down completely randomly.

Pair Corralation between NorthWestern and Canadian Utilities

Considering the 90-day investment horizon NorthWestern is expected to generate 1.09 times more return on investment than Canadian Utilities. However, NorthWestern is 1.09 times more volatile than Canadian Utilities Limited. It trades about -0.01 of its potential returns per unit of risk. Canadian Utilities Limited is currently generating about -0.06 per unit of risk. If you would invest  5,404  in NorthWestern on October 8, 2024 and sell it today you would lose (90.00) from holding NorthWestern or give up 1.67% of portfolio value over 90 days.

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

NorthWestern  vs.  Canadian Utilities Limited

NorthWestern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NorthWestern has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, NorthWestern is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Canadian Utilities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with NorthWestern and Canadian Utilities

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

The idea behind NorthWestern and Canadian Utilities 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.