Correlation Between Discipline Fund and Northern Lights

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

By analyzing existing cross correlation between Discipline Fund ETF and Northern Lights, you can compare the effects of market volatilities on Discipline Fund and Northern Lights 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 Discipline Fund with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Discipline Fund and Northern Lights.

Diversification Opportunities for Discipline Fund and Northern Lights

0.9

Correlation Coefficient

Discipline Fund  Northern Lights

Almost no diversification

The 3 months correlation between Discipline and Northern is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Discipline Fund ETF and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Discipline Fund 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 Discipline Fund ETF are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Discipline Fund i.e., Discipline Fund and Northern Lights go up and down completely randomly.

Pair Corralation between Discipline Fund and Northern Lights

Given the investment horizon of 90 days Discipline Fund ETF is expected to generate 0.78 times more return on investment than Northern Lights. However, Discipline Fund ETF is 1.28 times less risky than Northern Lights. It trades about -0.16 of its potential returns per unit of risk. Northern Lights is currently generating about -0.16 per unit of risk. If you would invest  2,348  in Discipline Fund ETF on September 28, 2024 and sell it today you would lose (85.00) from holding Discipline Fund ETF or give up 3.62% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Discipline Fund ETF  vs.  Northern Lights

Discipline Fund ETF

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Discipline Fund ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, Discipline Fund is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Northern Lights

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Northern Lights is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Discipline Fund and Northern Lights

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

The idea behind Discipline Fund ETF and Northern Lights 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.