Correlation Between Norsk Hydro and CF Industries

Can any of the company-specific risk be diversified away by investing in both Norsk Hydro and CF Industries 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 Norsk Hydro and CF Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Norsk Hydro ASA and CF Industries Holdings, you can compare the effects of market volatilities on Norsk Hydro and CF Industries 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 Norsk Hydro with a short position of CF Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norsk Hydro and CF Industries.

Diversification Opportunities for Norsk Hydro and CF Industries

0.67

Correlation Coefficient

Norsk Hydro  CF Industries

Poor diversification

The 3 months correlation between Norsk and C4F is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and CF Industries Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CF Industries Holdings and Norsk Hydro 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 Norsk Hydro ASA are associated (or correlated) with CF Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CF Industries Holdings has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and CF Industries go up and down completely randomly.

Pair Corralation between Norsk Hydro and CF Industries

Assuming the 90 days trading horizon Norsk Hydro is expected to generate 1.83 times less return on investment than CF Industries. In addition to that, Norsk Hydro is 1.81 times more volatile than CF Industries Holdings. It trades about 0.06 of its total potential returns per unit of risk. CF Industries Holdings is currently generating about 0.19 per unit of volatility. If you would invest  7,099  in CF Industries Holdings on September 14, 2024 and sell it today you would earn a total of  1,459  from holding CF Industries Holdings or generate 20.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Norsk Hydro ASA  vs.  CF Industries Holdings

Norsk Hydro ASA

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Norsk Hydro ASA are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain technical indicators, Norsk Hydro may actually be approaching a critical reversion point that can send shares even higher in January 2025.

CF Industries Holdings

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CF Industries Holdings are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, CF Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norsk Hydro and CF Industries

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

The idea behind Norsk Hydro ASA and CF Industries Holdings 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.