Correlation Between NORTHEAST UTILITIES and DIVERSIFIED ROYALTY

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

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

Diversification Opportunities for NORTHEAST UTILITIES and DIVERSIFIED ROYALTY

0.15

Correlation Coefficient

NORTHEAST UTILITIES  DIVERSIFIED ROYALTY

Average diversification

The 3 months correlation between NORTHEAST and DIVERSIFIED is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding NORTHEAST UTILITIES and DIVERSIFIED ROYALTY in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIVERSIFIED ROYALTY and NORTHEAST UTILITIES 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 NORTHEAST UTILITIES are associated (or correlated) with DIVERSIFIED ROYALTY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DIVERSIFIED ROYALTY has no effect on the direction of NORTHEAST UTILITIES i.e., NORTHEAST UTILITIES and DIVERSIFIED ROYALTY go up and down completely randomly.

Pair Corralation between NORTHEAST UTILITIES and DIVERSIFIED ROYALTY

Assuming the 90 days trading horizon NORTHEAST UTILITIES is expected to generate 6.25 times less return on investment than DIVERSIFIED ROYALTY. But when comparing it to its historical volatility, NORTHEAST UTILITIES is 2.01 times less risky than DIVERSIFIED ROYALTY. It trades about 0.01 of its potential returns per unit of risk. DIVERSIFIED ROYALTY is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  189.00  in DIVERSIFIED ROYALTY on October 7, 2024 and sell it today you would earn a total of  6.00  from holding DIVERSIFIED ROYALTY or generate 3.17% return on investment over 90 days.

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

NORTHEAST UTILITIES  vs.  DIVERSIFIED ROYALTY

NORTHEAST UTILITIES

Risk-Adjusted Performance

0 of 100

Very Weak

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

DIVERSIFIED ROYALTY

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in DIVERSIFIED ROYALTY are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, DIVERSIFIED ROYALTY is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with NORTHEAST UTILITIES and DIVERSIFIED ROYALTY

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

The idea behind NORTHEAST UTILITIES and DIVERSIFIED ROYALTY 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.