Can any of the company-specific risk be diversified away by investing in both Dimensional International 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 Dimensional International and Northern Lights into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Dimensional International High and Northern Lights, you can compare the effects of market volatilities on Dimensional International 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 Dimensional International with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dimensional International and Northern Lights.
Diversification Opportunities for Dimensional International and Northern Lights
The 3 months correlation between Dimensional and Northern is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Dimensional International High and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Dimensional International 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 Dimensional International High 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 Dimensional International i.e., Dimensional International and Northern Lights go up and down completely randomly.
Pair Corralation between Dimensional International and Northern Lights
Given the investment horizon of 90 days Dimensional International High is expected to generate 0.93 times more return on investment than Northern Lights. However, Dimensional International High is 1.07 times less risky than Northern Lights. It trades about 0.0 of its potential returns per unit of risk. Northern Lights is currently generating about -0.01 per unit of risk. If you would invest 2,430 in Dimensional International High on July 2, 2023 and sell it today you would lose (111.00) from holding Dimensional International High or give up 4.57% of portfolio value over 90 days.
Over the last 90 days Dimensional International High has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical indicators, Dimensional International is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.
Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. 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.
Dimensional International and Northern Lights Volatility Contrast
Predicted Return Density
Pair Trading with Dimensional International and Northern Lights
The main advantage of trading using opposite Dimensional International and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dimensional International 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 Dimensional International High 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.
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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.
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