Correlation Between Federal Agricultural and Northrop Grumman

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

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

Diversification Opportunities for Federal Agricultural and Northrop Grumman

-0.36

Correlation Coefficient

Federal Agricultural  Northrop Grumman

Very good diversification

The 3 months correlation between Federal and Northrop is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Federal Agricultural Mortgage and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman and Federal Agricultural 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 Federal Agricultural Mortgage are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of Federal Agricultural i.e., Federal Agricultural and Northrop Grumman go up and down completely randomly.

Pair Corralation between Federal Agricultural and Northrop Grumman

Assuming the 90 days horizon Federal Agricultural Mortgage is expected to generate 1.46 times more return on investment than Northrop Grumman. However, Federal Agricultural is 1.46 times more volatile than Northrop Grumman. It trades about 0.15 of its potential returns per unit of risk. Northrop Grumman is currently generating about -0.01 per unit of risk. If you would invest  16,800  in Federal Agricultural Mortgage on September 17, 2024 and sell it today you would earn a total of  3,400  from holding Federal Agricultural Mortgage or generate 20.24% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Federal Agricultural Mortgage  vs.  Northrop Grumman

Federal Agricultural

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Agricultural Mortgage are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Federal Agricultural reported solid returns over the last few months and may actually be approaching a breakup point.

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. Despite nearly stable basic indicators, Northrop Grumman is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Federal Agricultural and Northrop Grumman

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

The idea behind Federal Agricultural Mortgage and Northrop Grumman 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.