Correlation Between American Express and Northrop Grumman

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

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

Diversification Opportunities for American Express and Northrop Grumman

0.5

Correlation Coefficient

American Express  Northrop Grumman

Very weak diversification

The 3 months correlation between American and Northrop is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding American Express and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman and American Express 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 American Express are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of American Express i.e., American Express and Northrop Grumman go up and down completely randomly.

Pair Corralation between American Express and Northrop Grumman

Considering the 90-day investment horizon American Express is expected to generate 1.65 times more return on investment than Northrop Grumman. However, American Express is 1.65 times more volatile than Northrop Grumman. It trades about 0.19 of its potential returns per unit of risk. Northrop Grumman is currently generating about 0.05 per unit of risk. If you would invest  22,377  in American Express on January 26, 2024 and sell it today you would earn a total of  1,535  from holding American Express or generate 6.86% return on investment over 90 days.

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

American Express  vs.  Northrop Grumman

American Express

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Express are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal basic indicators, American Express reported solid returns over the last few months and may actually be approaching a breakup point.

Northrop Grumman

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northrop Grumman are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Northrop Grumman may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with American Express and Northrop Grumman

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

The idea behind American Express and Northrop Grumman 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.