Correlation Between Northern Lights and ALPS Equal

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

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

Diversification Opportunities for Northern Lights and ALPS Equal

0.9

Correlation Coefficient

Northern Lights  ALPS Equal

Almost no diversification

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

Pair Corralation between Northern Lights and ALPS Equal

Given the investment horizon of 90 days Northern Lights is expected to generate 1.18 times more return on investment than ALPS Equal. However, Northern Lights is 1.18 times more volatile than ALPS Equal Sector. It trades about 0.11 of its potential returns per unit of risk. ALPS Equal Sector is currently generating about 0.12 per unit of risk. If you would invest  2,813  in Northern Lights on September 28, 2024 and sell it today you would earn a total of  717.00  from holding Northern Lights or generate 25.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.63%
Values	Daily Returns

Northern Lights  vs.  ALPS Equal Sector

Northern Lights

Risk-Adjusted Performance

2 of 100

Weak

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 current stock price tumult, may contribute to shorter-term losses for the shareholders.

ALPS Equal Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ALPS Equal Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, ALPS Equal is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Northern Lights and ALPS Equal

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

The idea behind Northern Lights and ALPS Equal Sector 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.