Correlation Between Energy Basic and Northern Lights

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

By analyzing existing cross correlation between Energy Basic Materials and Northern Lights, you can compare the effects of market volatilities on Energy Basic and Northern Lights 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 Energy Basic with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Basic and Northern Lights.

Diversification Opportunities for Energy Basic and Northern Lights

0.26

Correlation Coefficient

Energy Basic  Northern Lights

Modest diversification

The 3 months correlation between Energy and Northern is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Energy Basic Materials and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Energy Basic 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 Energy Basic Materials are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Energy Basic i.e., Energy Basic and Northern Lights go up and down completely randomly.

Pair Corralation between Energy Basic and Northern Lights

Assuming the 90 days horizon Energy Basic Materials is expected to under-perform the Northern Lights. In addition to that, Energy Basic is 1.67 times more volatile than Northern Lights. It trades about 0.0 of its total potential returns per unit of risk. Northern Lights is currently generating about 0.13 per unit of volatility. If you would invest  2,863  in Northern Lights on September 13, 2024 and sell it today you would earn a total of  122.00  from holding Northern Lights or generate 4.26% return on investment over 90 days.

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

Energy Basic Materials  vs.  Northern Lights

Energy Basic Materials

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Energy Basic Materials has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Energy Basic is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Northern Lights

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking indicators, Northern Lights is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Energy Basic and Northern Lights

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

The idea behind Energy Basic Materials and Northern Lights 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 Stocks Directory module to find actively traded stocks across global markets.