Can any of the company-specific risk be diversified away by investing in both Dimensional ETF 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 ETF 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 ETF Trust and Northern Lights, you can compare the effects of market volatilities on Dimensional ETF 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 ETF with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dimensional ETF and Northern Lights.
Diversification Opportunities for Dimensional ETF and Northern Lights
The 3 months correlation between Dimensional and Northern is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Dimensional ETF Trust and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Dimensional ETF 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 ETF Trust 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 ETF i.e., Dimensional ETF and Northern Lights go up and down completely randomly.
Pair Corralation between Dimensional ETF and Northern Lights
Given the investment horizon of 90 days Dimensional ETF Trust is expected to generate 0.98 times more return on investment than Northern Lights. However, Dimensional ETF Trust is 1.02 times less risky than Northern Lights. It trades about -0.16 of its potential returns per unit of risk. Northern Lights is currently generating about -0.5 per unit of risk. If you would invest 2,434 in Dimensional ETF Trust on July 2, 2023 and sell it today you would lose (56.00) from holding Dimensional ETF Trust or give up 2.3% of portfolio value over 90 days.
Over the last 90 days Dimensional ETF Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Dimensional ETF is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated 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 ETF and Northern Lights Volatility Contrast
Predicted Return Density
Pair Trading with Dimensional ETF and Northern Lights
The main advantage of trading using opposite Dimensional ETF and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dimensional ETF 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 ETF Trust 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.
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