Can any of the company-specific risk be diversified away by investing in both Northern Lights and McDonalds 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 McDonalds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern Lights and McDonalds, you can compare the effects of market volatilities on Northern Lights and McDonalds 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 McDonalds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and McDonalds.
Diversification Opportunities for Northern Lights and McDonalds
The 3 months correlation between Northern and McDonalds is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds 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 McDonalds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McDonalds has no effect on the direction of Northern Lights i.e., Northern Lights and McDonalds go up and down completely randomly.
Pair Corralation between Northern Lights and McDonalds
Given the investment horizon of 90 days Northern Lights is expected to generate 0.87 times more return on investment than McDonalds. However, Northern Lights is 1.16 times less risky than McDonalds. It trades about 0.04 of its potential returns per unit of risk. McDonalds is currently generating about 0.0 per unit of risk. If you would invest 2,763 in Northern Lights on September 1, 2023 and sell it today you would earn a total of 46.00 from holding Northern Lights or generate 1.66% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 2 (%) 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.
Over the last 90 days McDonalds has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, McDonalds is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.
The main advantage of trading using opposite Northern Lights and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights position performs unexpectedly, McDonalds 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 McDonalds will offset losses from the drop in McDonalds' long position.
The idea behind Northern Lights and McDonalds 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.
Check upcoming earnings announcements updated hourly across public exchanges
Macroaxis helps investors of all levels and skills to maximize the upside of all their holdings and minimize the risk
associated with market volatility, economic swings, and company-specific events. View terms and conditions