Correlation Between IShares ESG and Northern Lights

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

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

Diversification Opportunities for IShares ESG and Northern Lights

0.89

Correlation Coefficient

IShares ESG  Northern Lights

Very poor diversification

The 3 months correlation between IShares and Northern is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding iShares ESG Advanced and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and IShares ESG 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 iShares ESG Advanced 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 IShares ESG i.e., IShares ESG and Northern Lights go up and down completely randomly.

Pair Corralation between IShares ESG and Northern Lights

Given the investment horizon of 90 days iShares ESG Advanced is expected to generate 1.32 times more return on investment than Northern Lights. However, IShares ESG is 1.32 times more volatile than Northern Lights. It trades about 0.13 of its potential returns per unit of risk. Northern Lights is currently generating about 0.14 per unit of risk. If you would invest  4,807  in iShares ESG Advanced on September 13, 2024 and sell it today you would earn a total of  335.00  from holding iShares ESG Advanced or generate 6.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

iShares ESG Advanced  vs.  Northern Lights

iShares ESG Advanced

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares ESG Advanced are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, IShares ESG may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Northern Lights

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with IShares ESG and Northern Lights

The main advantage of trading using opposite IShares ESG and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares ESG 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 iShares ESG Advanced 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.