Can any of the company-specific risk be diversified away by investing in both Northern Lights and Dimensional International 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 Northern Lights and Dimensional International into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern Lights and Dimensional International High, you can compare the effects of market volatilities on Northern Lights and Dimensional International 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 Northern Lights with a short position of Dimensional International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and Dimensional International.
Diversification Opportunities for Northern Lights and Dimensional International
The 3 months correlation between Northern and Dimensional is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Dimensional International High in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dimensional International and Northern Lights 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 Northern Lights are associated (or correlated) with Dimensional International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dimensional International has no effect on the direction of Northern Lights i.e., Northern Lights and Dimensional International go up and down completely randomly.
Pair Corralation between Northern Lights and Dimensional International
Given the investment horizon of 90 days Northern Lights is expected to generate 1.06 times more return on investment than Dimensional International. However, Northern Lights is 1.06 times more volatile than Dimensional International High. It trades about 0.26 of its potential returns per unit of risk. Dimensional International High is currently generating about 0.2 per unit of risk. If you would invest 2,566 in Northern Lights on September 2, 2023 and sell it today you would earn a total of 261.00 from holding Northern Lights or generate 10.17% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 4 (%) 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 latest stock price tumult, may contribute to shorter-term losses for the shareholders.
Compared to the overall equity markets, risk-adjusted returns on investments in Dimensional International High are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical indicators, Dimensional International is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.
Northern Lights and Dimensional International Volatility Contrast
Predicted Return Density
Pair Trading with Northern Lights and Dimensional International
The main advantage of trading using opposite Northern Lights and Dimensional International positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights position performs unexpectedly, Dimensional International 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 Dimensional International will offset losses from the drop in Dimensional International's long position.
The idea behind Northern Lights and Dimensional International High 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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