Correlation Between Southern and NorthWestern

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

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

Diversification Opportunities for Southern and NorthWestern

0.7

Correlation Coefficient

Southern  NorthWestern

Poor diversification

The 3 months correlation between Southern and NorthWestern is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and NorthWestern in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NorthWestern and Southern 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 Southern Company are associated (or correlated) with NorthWestern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NorthWestern has no effect on the direction of Southern i.e., Southern and NorthWestern go up and down completely randomly.

Pair Corralation between Southern and NorthWestern

Allowing for the 90-day total investment horizon Southern Company is expected to generate 0.89 times more return on investment than NorthWestern. However, Southern Company is 1.12 times less risky than NorthWestern. It trades about 0.05 of its potential returns per unit of risk. NorthWestern is currently generating about 0.01 per unit of risk. If you would invest  6,625  in Southern Company on September 29, 2024 and sell it today you would earn a total of  1,689  from holding Southern Company or generate 25.49% return on investment over 90 days.

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

Southern Company  vs.  NorthWestern

Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

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.

Pair Trading with Southern and NorthWestern

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

The idea behind Southern Company and NorthWestern 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.