Correlation Between Southern and Newpark Resources
Can any of the company-specific risk be diversified away by investing in both Southern and Newpark Resources 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 Newpark Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Southern Company and Newpark Resources, you can compare the effects of market volatilities on Southern and Newpark Resources 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 Newpark Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southern and Newpark Resources.
Diversification Opportunities for Southern and Newpark Resources
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Southern and Newpark is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Southern Company and Newpark Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Newpark Resources 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 Newpark Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Newpark Resources has no effect on the direction of Southern i.e., Southern and Newpark Resources go up and down completely randomly.
Pair Corralation between Southern and Newpark Resources
Allowing for the 90-day total investment horizon Southern is expected to generate 2.93 times less return on investment than Newpark Resources. But when comparing it to its historical volatility, Southern Company is 1.85 times less risky than Newpark Resources. It trades about 0.12 of its potential returns per unit of risk. Newpark Resources is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest 627.00 in Newpark Resources on January 20, 2024 and sell it today you would earn a total of 101.00 from holding Newpark Resources or generate 16.11% 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. Newpark Resources
Performance |
| Timeline |
| Southern |
| Newpark Resources |
Southern and Newpark Resources Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Southern and Newpark Resources
The main advantage of trading using opposite Southern and Newpark Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southern position performs unexpectedly, Newpark Resources 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 Newpark Resources will offset losses from the drop in Newpark Resources' long position.The idea behind Southern Company and Newpark Resources 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.Check out your portfolio center.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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.
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