Correlation Between NorAm Drilling and Nestlé SA

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

By analyzing existing cross correlation between NorAm Drilling AS and Nestl SA, you can compare the effects of market volatilities on NorAm Drilling and Nestlé SA 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 NorAm Drilling with a short position of Nestlé SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of NorAm Drilling and Nestlé SA.

Diversification Opportunities for NorAm Drilling and Nestlé SA

0.38

Correlation Coefficient

NorAm Drilling  Nestlé SA

Weak diversification

The 3 months correlation between NorAm and Nestlé is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding NorAm Drilling AS and Nestl SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nestlé SA and NorAm Drilling 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 NorAm Drilling AS are associated (or correlated) with Nestlé SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nestlé SA has no effect on the direction of NorAm Drilling i.e., NorAm Drilling and Nestlé SA go up and down completely randomly.

Pair Corralation between NorAm Drilling and Nestlé SA

Assuming the 90 days horizon NorAm Drilling AS is expected to generate 9.55 times more return on investment than Nestlé SA. However, NorAm Drilling is 9.55 times more volatile than Nestl SA. It trades about 0.06 of its potential returns per unit of risk. Nestl SA is currently generating about -0.03 per unit of risk. If you would invest  105.00  in NorAm Drilling AS on September 13, 2024 and sell it today you would earn a total of  184.00  from holding NorAm Drilling AS or generate 175.24% return on investment over 90 days.

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

NorAm Drilling AS  vs.  Nestl SA

NorAm Drilling AS

Risk-Adjusted Performance

0 of 100

Insignificant

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

Nestlé SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nestl SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with NorAm Drilling and Nestlé SA

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

The idea behind NorAm Drilling AS and Nestl SA 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.