Correlation Between North American and Lithium Energi

Can any of the company-specific risk be diversified away by investing in both North American and Lithium Energi 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 North American and Lithium Energi into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between North American Construction and Lithium Energi Exploration, you can compare the effects of market volatilities on North American and Lithium Energi 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 North American with a short position of Lithium Energi. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Lithium Energi.

Diversification Opportunities for North American and Lithium Energi

-0.72

Correlation Coefficient

North American  Lithium Energi

Pay attention - limited upside

The 3 months correlation between North and Lithium is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Lithium Energi Exploration in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithium Energi Explo and North American 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 North American Construction are associated (or correlated) with Lithium Energi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lithium Energi Explo has no effect on the direction of North American i.e., North American and Lithium Energi go up and down completely randomly.

Pair Corralation between North American and Lithium Energi

Assuming the 90 days trading horizon North American is expected to generate 2.06 times less return on investment than Lithium Energi. But when comparing it to its historical volatility, North American Construction is 5.5 times less risky than Lithium Energi. It trades about 0.1 of its potential returns per unit of risk. Lithium Energi Exploration is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  4.50  in Lithium Energi Exploration on September 23, 2024 and sell it today you would lose (1.00) from holding Lithium Energi Exploration or give up 22.22% of portfolio value over 90 days.

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

North American Construction  vs.  Lithium Energi Exploration

North American Const

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, North American displayed solid returns over the last few months and may actually be approaching a breakup point.

Lithium Energi Explo

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Lithium Energi Exploration are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Lithium Energi showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North American and Lithium Energi

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

The idea behind North American Construction and Lithium Energi Exploration 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.