Can any of the company-specific risk be diversified away by investing in both Northern Lights and Listed Funds 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 Listed Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern Lights and Listed Funds Trust, you can compare the effects of market volatilities on Northern Lights and Listed Funds 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 Listed Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and Listed Funds.
Diversification Opportunities for Northern Lights and Listed Funds
The 3 months correlation between Northern and Listed is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Listed Funds Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Listed Funds Trust 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 Listed Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Listed Funds Trust has no effect on the direction of Northern Lights i.e., Northern Lights and Listed Funds go up and down completely randomly.
Pair Corralation between Northern Lights and Listed Funds
Given the investment horizon of 90 days Northern Lights is expected to under-perform the Listed Funds. In addition to that, Northern Lights is 1.45 times more volatile than Listed Funds Trust. It trades about -0.01 of its total potential returns per unit of risk. Listed Funds Trust is currently generating about 0.02 per unit of volatility. If you would invest 2,805 in Listed Funds Trust on July 2, 2023 and sell it today you would earn a total of 199.00 from holding Listed Funds Trust or generate 7.09% return on investment over 90 days.
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.
Over the last 90 days Listed Funds Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, Listed Funds is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
Northern Lights and Listed Funds Volatility Contrast
Predicted Return Density
Pair Trading with Northern Lights and Listed Funds
The main advantage of trading using opposite Northern Lights and Listed Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights position performs unexpectedly, Listed Funds 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 Listed Funds will offset losses from the drop in Listed Funds' long position.
The idea behind Northern Lights and Listed Funds Trust 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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