Correlation Between Northrop Grumman and AAR Corp

Can any of the company-specific risk be diversified away by investing in both Northrop Grumman and AAR Corp 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 Northrop Grumman and AAR Corp into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northrop Grumman and AAR Corp, you can compare the effects of market volatilities on Northrop Grumman and AAR Corp 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 Northrop Grumman with a short position of AAR Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northrop Grumman and AAR Corp.

Diversification Opportunities for Northrop Grumman and AAR Corp

-0.3

Correlation Coefficient

Northrop Grumman  AAR Corp

Very good diversification

The 3 months correlation between Northrop and AAR is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Northrop Grumman and AAR Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AAR Corp and Northrop Grumman 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 Northrop Grumman are associated (or correlated) with AAR Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AAR Corp has no effect on the direction of Northrop Grumman i.e., Northrop Grumman and AAR Corp go up and down completely randomly.

Pair Corralation between Northrop Grumman and AAR Corp

Considering the 90-day investment horizon Northrop Grumman is expected to generate 0.52 times more return on investment than AAR Corp. However, Northrop Grumman is 1.93 times less risky than AAR Corp. It trades about -0.13 of its potential returns per unit of risk. AAR Corp is currently generating about -0.09 per unit of risk. If you would invest  46,239  in Northrop Grumman on January 17, 2024 and sell it today you would lose (1,110) from holding Northrop Grumman or give up 2.4% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Northrop Grumman  vs.  AAR Corp

Northrop Grumman

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northrop Grumman has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Northrop Grumman is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

AAR Corp

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AAR Corp are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak forward indicators, AAR Corp may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Northrop Grumman and AAR Corp

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

The idea behind Northrop Grumman and AAR Corp 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.