Correlation Between Northern Lights and OShares Europe

Can any of the company-specific risk be diversified away by investing in both Northern Lights and OShares Europe 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 OShares Europe into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northern Lights and OShares Europe Quality, you can compare the effects of market volatilities on Northern Lights and OShares Europe 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 OShares Europe. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and OShares Europe.

Diversification Opportunities for Northern Lights and OShares Europe

Almost no diversification

The 3 months correlation between Northern and OShares is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and OShares Europe Quality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on OShares Europe Quality 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 OShares Europe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of OShares Europe Quality has no effect on the direction of Northern Lights i.e., Northern Lights and OShares Europe go up and down completely randomly.

Pair Corralation between Northern Lights and OShares Europe

Given the investment horizon of 90 days Northern Lights is expected to generate about the same return on investment as OShares Europe Quality. But, Northern Lights is 1.08 times less risky than OShares Europe. It trades about 0.07 of its potential returns per unit of risk. OShares Europe Quality is currently generating about 0.07 per unit of risk. If you would invest  2,393  in OShares Europe Quality on September 7, 2023 and sell it today you would earn a total of  375.00  from holding OShares Europe Quality or generate 15.67% return on investment over 90 days.

Northern Lights  vs.  OShares Europe Quality

Northern Lights

Northern Performance

3 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 3 (%) 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.

OShares Europe Quality

OShares Performance

6 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in OShares Europe Quality are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, OShares Europe is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Northern Lights and OShares Europe

The main advantage of trading using opposite Northern Lights and OShares Europe positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights position performs unexpectedly, OShares Europe 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 OShares Europe will offset losses from the drop in OShares Europe's long position.

The idea behind Northern Lights and OShares Europe Quality 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.

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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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.