Correlation Between NorthWestern and Southern

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

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

Diversification Opportunities for NorthWestern and Southern

0.69

Correlation Coefficient

NorthWestern  Southern

Poor diversification

The 3 months correlation between NorthWestern and Southern is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding NorthWestern and Southern Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern and NorthWestern 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 NorthWestern are associated (or correlated) with Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern has no effect on the direction of NorthWestern i.e., NorthWestern and Southern go up and down completely randomly.

Pair Corralation between NorthWestern and Southern

Considering the 90-day investment horizon NorthWestern is expected to generate 1.34 times more return on investment than Southern. However, NorthWestern is 1.34 times more volatile than Southern Company. It trades about -0.06 of its potential returns per unit of risk. Southern Company is currently generating about -0.11 per unit of risk. If you would invest  5,650  in NorthWestern on September 28, 2024 and sell it today you would lose (305.00) from holding NorthWestern or give up 5.4% of portfolio value over 90 days.

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

NorthWestern  vs.  Southern Company

NorthWestern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NorthWestern has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, NorthWestern is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with NorthWestern and Southern

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

The idea behind NorthWestern and Southern Company 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.